ETFs (Exchange Traded Funds) are securities or market instruments that track a specific market index or sector or other assets, However, they can be bought or sold on the stock exchange just like a regular stock.
Even though ETFs and mutual funds have a lot in common, there are some differences in the way they are managed. For one, mutual funds are mainly actively managed and that means a fund manager takes decisions regarding the allocation of assets in the fund. On the other hand, ETFs are mainly passively managed and hence, based on a certain market index, in other words, they track the market index and can be bought and sold like stocks.
A lot of investors choose ETFs over mutual funds because of the following advantages:
1. Tax Benefits: There are capital gains taxes on ETFs only when they are sold, whereas mutual funds incur capital gains taxes throughout the course of the investment as the shares are always being traded. By choosing an ETF for a long-term investment, one can reduce taxation.
2. Easy to understand: ETFs are easier to trade. All one needs to do is buy or sell them through a simple trade. On the other hand, though mutual funds are not complicated, there’s some waiting time involved before the transaction goes through.
3. Ease of transferability: While moving a managed portfolio from one investment firm to another, there may be some issues with the mutual funds. Most of the time, the fund positions have to be closed before the transfer which means that the investor has to make an unplanned trade that could lead to losses. ETFs do not have this problem as they are a portable investment and can be transferred easily while changing investment firms.
There are other advantages of choosing ETFs over mutual funds such as the cost-effectiveness of ETF investments. However, the choice of an investment instrument should take an investor’s portfolio and risk appetite into consideration.