Advantages of ETFs: Reduce the Risk of Fraud

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

You could be investing COMMISSION FREE in
Focus Morningstar ETFs with Scottrade!

ETFs reduce the risk of fraud

ETFs are generally more transparent than mutual funds. In the investing world, transparency refers to the ease with which an investor can gain access to information about an investment and ETFs tend to be more transparent because they typically disclose:

  • The specific components of the indexes they track
  • The weighting of their components — the percentage that each investment occupies within the index

A mutual fund discloses the investments it owns only periodically, when it releases a new prospectus. But significant changes in the fund’s investments can occur between these updates and because of this lag, mutual fund investors must implicitly and explicitly trust that the fund manager is operating in the shareholders’ best interest. The lack of transparency in the mutual fund industry has led to several notable instances of fraud, such as the after-hours fund trading scandal of 2003.

How do you really know what your mutual fund is invested in? Has the fund manager started to chase returns to prop up the fund’s lagging performance? Has the fund been “churned”? Churning is the continual buying and selling of investments to generate brokerage commissions but a mutual fund could be the victim of churning if the fund manager is planning to jump ship and it’s in his best interest.

The point is: you just don’t know with a mutual fund. I’m sure that the majority of mutual fund managers are ethical and operate legally, but I personally prefer to invest MY hard-earned money in ETFs with their better transparency.

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

About the author

Ron Haynes has written 1091 articles on The Wisdom Journal.

Ron is the founder and editor of The Wisdom Journal. He has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a partner in a national building materials company.

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