May 10, 2021
Are Exchange-Traded Funds better than Mutual Funds?
Know the difference between Mutual Funds and Exchange-Traded Funds in this episode of Daily Wisdom!
Attorney and Financial Advisor Chris Berry discuss the pros and cons of both Mutual and Exchange-Traded Funds.
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Episode Transcript
Investment Risk
Hello, everyone. This is Chris Berry with Castle Wealth Group, and today we’re going to talk about the difference between mutual funds versus ETFs or exchange-traded funds. If you like this information, please make sure to subscribe to our YouTube channel.
Christopher Berry is a leading estate attorney and advisor in the area of retirement and legacy planning. He has been featured in publications such as Forbes, Kiplinger’s, Crain’s Detroit and more. He’s the host of the weekly radio show and podcast, The Chris Berry Show. He’s a national thought leader as it relates to retirement and legacy planning, and has authored the Amazon bestselling book, The Caregiver’s Legal Guide.
So when we’re talking about investing in the market, understand there are some risk that goes along with them. And we can have aggressive portfolios, and we can have conservative portfolios, and we can have everything in between them. A lot of times what we’ll do is we’ll do a volatility analysis with our clients to figure out how much risk are they truly willing to take on in their portfolio. And then once we’ve done that, we’ll put together a portfolio that matches their volatility tolerance, and we might break it into different buckets based on time horizons. But when we’re investing in the market, really what we’re looking at typically is a mixture of stocks or equities, bonds and maybe some cash, and maybe some alternative investments.
And so, when we’re talking about equities and talking about putting together a portfolio, typically we’re looking at two types of portfolios. One would be what’s called a mutual fund, which is an assortment of stocks or equities and bonds, and alternatives, and cash that’s kind of lumped together. Or we might have what is called exchange-traded funds or ETFs. Now, with mutual funds, when they fit into a portfolio, typically you’re going to have a fund manager for that specific mutual fund. Now, the downside of that is there might be some additional fees tied to that mutual fund, with the idea that these are a little bit more actively managed.
Exchange Traded Funds
The idea or the concept is that by having someone managing this in a active manner, they’re going to be looking at trends in the market and adjusting their portfolio based on how things are going or economic indicators, with the idea that if things look good it might get more aggressive. If things look bleak, then that mutual fund might get a little bit more conservative. So, there are certain investments or mutual funds that have gold as part of their portfolio. And so, if things are looking rough, then maybe the… If you look at it like an ice cube tray, and we’re investing in a variety of different investments, then maybe with a mutual fund, if a portfolio manager sees that the economy is going a little off-kilter, maybe they tilt that mutual fund more towards the gold side or more towards the conservative and investments.
Versus if we’re looking at a market and we want to get more aggressive, then their portfolio manager might tilt that ice cube tray filled with the water more towards the equities or the more aggressive side of the portfolio. So the trade-off for a little bit of a higher fee, higher expense ratio because you’re paying for a mutual fund manager to manage that specific mutual fund and all the investments inside of it, is the idea that you get a little bit more variance depending on how the market is doing.
Now, on the flip side of things, when we’re talking about investing in the market, we also have what’s called ETFs or exchange-traded funds, which is basically, you’re not paying for someone to specifically manage the investments inside of this piece of the portfolio for the ETF like you would at mutual fund. But here it’s just looking at an exchange-traded fund, things like the S&P 500, which is just picking a mixture of equities, and putting all these equities together and calling that an ETF. So you’re going to have lower fees for an exchange-traded fund, but you’re not going to have as much flexibility, you’re not going to have as much of active management where it’s going to look at how the market’s doing.
Now, when we’re managing an overall portfolio, of course, we can take money out of ETF or take money out of a mutual fund, but these, with a mutual fund it’s going to self-correct a little bit on its own with the mutual fund manager versus the ETF. It’s kind of fire and forget. And so if we didn’t really like how the ETF was performing or concerned how it’s going to perform in the future, we would want to pull the money out, or pull some of the money out and maybe look in a different direction.
So really you’re looking at something that’s passively manage versus actively manage. Actively manage will have higher fees, but it might have more protection against volatility versus an ETF. It’s going to have lower fees, but it’s going to be more subject to the volatility of the market. So hopefully that was helpful the difference between a mutual fund versus an ETF. If you have any questions, please reach out to us and make sure to subscribe to our YouTube channel. Thank you so much.
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