I’ve already written about Why ETFs Beat Individual Stocks but did you know ETFs also beat mutual funds? Though Exchange Traded Funds (ETFs) and mutual funds both allow investors to own a group of investments by making just one purchase, ETFs have several distinct advantages over mutual funds:
ETFs vs mutual funds
- ETFs have Low Minimum Investment and Trading Flexibility
- ETFs typically have lower Expense Ratios
- ETFs offer trading flexibility
- ETFs also offer some tax advantages
- ETFs offer protection against possible fraud
- ETFs have opportunities for options and short selling
ETFs have low minimum investment requirements
If you’re planning to directly invest in a mutual fund, remember that nearly all mutual funds have minimum investment requirements, meaning that investors must purchase at least the minimum required amount in order to buy the fund. Minimums usually range from $1,000–3,000, though some can exceed $25,000. ETFs, on the other hand, have no minimum investment requirements. Investors can buy a single share of an ETF.
Vanguard has a $3,000 minimum investment requirement, while some Schwab funds require $10,000 (and up). I don’t know about you, but those kinds of numbers put investing out of reach for a large number of people.
The beauty of an ETF is that investors can easily purchase a single share of a large index without having to get a cash advance on a credit card.
ETFs offer trading flexibility
Stocks and ETFs change hands constantly throughout the standard trading day (9:30 a.m. to 4:00 p.m., Monday through Friday). Buying and selling mutual funds works differently. Though you can place orders to buy and sell funds at any time during the trading day, your orders won’t be fulfilled until shortly after trading ends at 4:00 p.m. each day. The delay that mutual funds impose on trading can be more than an inconvenience — it can also be costly. For example, if the market rises or falls in response to a major news event, such as a shift in interest rates or a spike in the price of oil, you might want to buy or sell your investment immediately, since the price of the investment might change substantially by the end of the day. ETFs let you buy or sell immediately — mutual funds don’t.
How to buy ETFs
You’ll have to open an account at a brokerage company. Click the links below to get further information:
- Scottrade – you can buy Focus Morningstar ETFs commission free!
- Etrade – helps you get started investing in three easy steps
- TradeKing – offers regular trades and broker assisted trades for only $4.95
- tradeMonster – offers mobile trading
- Zecco – has commission free trades available
- ShareBuilder – invest for only $4 on an automatic investment plan