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 usually have lower expense ratios
All mutual funds and ETFs have an expense ratio. This is a fee charged to shareholders to cover the costs that the firm incurs to manage the mutual fund or ETF. Expense ratios are expressed as an annual percentage, such as 1.00% or 0.75%. An investor who owns $10,000 worth of a mutual fund with an expense ratio of 1.00% will pay $100 per year in fees for the “privilege” of owning the fund.
The good news is that ETFs generally have a much lower expense ratio than actively managed mutual funds. They also tend to have lower expense ratios than those of comparable index funds, sometimes even lower than the index an ETF tracks. Why? There isn’t much “trading” going on within the fund. That automatically lowers the cost of maintaining the ETF.