How ETFs differ from mutual funds
The main difference between ETFs and mutual funds is that ETFs are traded on an exchange like individual stocks. By contrast, with mutual funds, you have to go through a fund company to buy into or sell out of them.
Because ETFs are traded like individual stocks, you can buy or sell them any time the market is open (typically through a custodian or broker), and the price will fluctuate throughout the day. On the other hand, the price of a mutual fund does not change during the day; orders to buy into or sell out of a mutual fund are processed at the end of the day, and the price depends on the closing price of the individual securities held by the fund.
In addition, ETFs typically (though not always) track an index, while many mutual funds (but not all) are actively managed. Therefore, ETFs are cheaper to have.
The pros and cons of ETFs
- Pros: ETFs tend to carry lower fees than mutual funds.1 Those who are investing outside of a tax-deferred retirement fund may benefit more from ETFs, which tend to be more tax-efficient than mutual funds. ETFs have a much lower turnover than actively-managed mutual funds. The way ETFs are traded on an exchange, in some cases, don't create tax consequences — another advantage of holding them rather than mutual funds.2
- Cons: While cost efficiencies help explain why ETFs are growing in popularity in the U.S., they're not as common in the global market — and that presents a bit of a challenge for investors who want to be more globally diversified. The fact that ETFs trade like stocks on an exchange may also be a downside. If you're a long-term investor, intraday price fluctuations may encourage you to trade more actively than you should, which is problematic because the more you trade, the more fees you can rack up.3
Should you hold ETFs in your investment portfolio?
To help determine if investing in ETFs makes sense for you, you need to consider how they fit into your overall financial plan and investment strategy. Working with the right financial advisor can help you make smart choices about what belongs in your investment portfolio, and what might not be a good fit for your situation.
If you have questions or want to learn more, a Synovus financial advisor can help. Give us a call at 1-888-SYNOVUS (1-888-796-6887).