Exchange-traded funds (ETFs) versus mutual funds

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Exchange-traded funds (ETFs) versus mutual funds

This article provides information about low cost ETFs, which account for only a few percent of the thousand plus ETFs and other exchange-traded products (ETPs) available to US investors. This article covers certain topics related to ETFs that are important to the investor who intends to use very low cost ETFs as an alternative to very low cost, no load mutual funds, when implementing a broadly diversified, passive, low tax, low effort, long-term buy-and-hold-and-hold-and hold investment strategy.

Low cost mutual funds and low cost ETFs are largely interchangeable. Either one or the other or some combination of the two will do. The commonality and interchangeability of ETFs and mutual funds is derived from an investor’s commitment to choose only very broadly diversified and very low cost investment funds of either type. At the low cost and very broadly diversified end of the investment fund product spectrum, either form of investment fund can serve the needs of the passive, long-term investor.

There have been long-running and generally self-interested financial industry arguments about the structural merits and demerits of mutual funds versus ETFs. These arguments are largely canards, as are so many other supposed “debates” about investing and investment products. The financial and investment industry perpetuates “debates,” whenever there is enough variability in results to enable self-interested denial or twisting of objective research evidence.

With mutual funds and ETFs, their differences and supposed advantages or disadvantages really only manifest themselves, when a sub-optimal investment strategy is attempted using either investment fund vehicle. Differences between ETFs and mutual funds can show up in less-diversified, higher cost, more active, higher turnover investment strategies. However, then the problem is not the comparative structure of the investment fund vehicle, but the lousy, sub-optimal strategy that deviates from a passive index investment strategy.

Whenever you decide to cut your investment costs to the bone, of necessity, you must choose from among broadly diversified, passive, index fund investments. Passive index tracking strategies are the only strategies that can be implemented cheaply and economically by an investment fund company. Passive index tracking strategies are the only fund strategies that can be priced very low in terms of the fees, costs, and taxes that the investor must pay directly or indirectly. Only if an investment fund operates very efficiently can it offer very low fees and be competitive.

At the highly efficient, low fee, low cost end of the investment fund product spectrum, index mutual funds and index ETFs become largely interchangeable. Both types of funds track the same passive, diversified indexes and both need to attract substantial assets to operate efficiently.Investors are cost sensitive and will direct their assets to lower cost vendors. The only way for vendors to be profitable is to run highly efficient operations, because the investors they attract refuse to pay high fees with no assurance of superior performance. With either low cost mutual funds or low cost ETFs, investor clientele have given up on the active-management shell game and are not attracted by ephemeral performance charts and stars. The just want low fees, low costs, and low taxes.

What are exchange-traded funds (ETFs) and exchange-traded products (ETPs)?

Structurally, ETFs are not as simple as mutual funds. This introduction points out a few things that you should pay attention to with ETFs. First, ETFs are a subset of the more general category of exchange-traded products (ETPs). To avoid, a longer discourse on ETFs and ETPs here, look at these two Wikipedia pages. If you have an interest and would like a starting point for your research, these Wikipedia pages are a place to start:

This article overviews some aspects of ETFs that are important in a decision about whether you might choose low cost no load mutual funds or/and low cost ETFs to implement a long-term, passive index investment strategy. Nevertheless, this introduction simply cannot offer a comprehensive treatment of the subject of ETFs and the broader category of ETPs. A proper treatment of ETFs/ETPs would be a thick book in itself.

You should be aware of these aspects of ETFs/ETPs. If you do not feel that you know enough about these topics and other features of exchange-traded products, you should do your research before investing in any exchange-traded product or ETF.








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