I have doing a little research about these two investments and there are some really interesting facts about the two. Yes, many are common sense facts, but I didn’t really think about it, because I am an investment newbie. I was reading over here at CNN Money, that ETF’s are much more tax efficient, but if you are trickling money into an investment, a good, low fee mutual fund is better. Here is a little more information from my perspective.
I just recently invested in an ETF or Exchange Traded Fund and it basically tracks a basket full of companies. This fund is slow and steady, but it is a pretty safe bet right now. They are traded just like a stock on the open market and all you pay is the commission to the broker you are with. This could range anywhere from $7 to $49.95. Remember, it all comes down to your broker. I only bought a handful of shares, just to see how it was done and I wanted to do it in a relatively safe fund. Investing in an ETF will defintiely benefit you if you have a good chunk of change to put into it. Let’s say you have $10,000 and you bought an ETF, you only pay the commission twice, due to the buy and sell. But, if you wanted to buy more shares of an ETF, you would eventually have to make a huge return to just earn your commissions back! That’s where a Mutual Fund comes into play. Oh and remember, if you have the ETF in a ROTH IRA, capital gains tax does not have to be paid!
In a Mutual Fund, you can trickle in money into a fund without too much hassle and you avoid paying the commission, because someone manages the fund. You do pay a fee for the fund depending on what you invest in. Some of the lower priced higher performing funds are over at Vanguard. This isn’t a shameless plug, but from my experience with my parents account, they have been the cheapest. You may not earn as high as a return with a Mutual Fund, but it is a better investment, if you don’t have a chunk of money.
In summary, if you dollar-cost-average, an ETF is a good way to go if you have an initial chunk of moeny that you can plunk down. But if you want to contribute continuously, a Mutual Fund may be your better bet.
