Basic Stuff: How ETFs Differ from Mutual Funds
"How to they differ from mutual funds?" is often the first question I am asked about ETFs. Here is my answer, in a nutshell:
They are similar in that they both represent “baskets” of securities (usually stocks or bonds), but mutual funds and ETFs differ in a number of ways:
ETFs trade differently. They can be bought and sold, and their price changes, throughout the day. Mutual fund orders, in contrast, can be made during the day, but the actual trading (and any resulting price change) doesn’t occur until after the markets close.
ETFs are cheaper. They require you to pay small trading commissions, but ETFs usually wind up costing you much less than a mutual fund because the ongoing operating expenses tend to be much less. Most ETFs charge no more than one-half of one percent a year, some less than one-tenth of one percent.
ETFs tend to track indexes. Managers of ETFs tend to do very little trading of securities in the ETF. The vast majority of mutual fund managers spend a lot of their time trading.
ETFs result in less tax. Because of low portfolio turnover and also the way they are structured, ETFs’ investment gains usually are more gingerly taxed than the gains on mutual funds.
Russell
They are similar in that they both represent “baskets” of securities (usually stocks or bonds), but mutual funds and ETFs differ in a number of ways:
ETFs trade differently. They can be bought and sold, and their price changes, throughout the day. Mutual fund orders, in contrast, can be made during the day, but the actual trading (and any resulting price change) doesn’t occur until after the markets close.
ETFs are cheaper. They require you to pay small trading commissions, but ETFs usually wind up costing you much less than a mutual fund because the ongoing operating expenses tend to be much less. Most ETFs charge no more than one-half of one percent a year, some less than one-tenth of one percent.
ETFs tend to track indexes. Managers of ETFs tend to do very little trading of securities in the ETF. The vast majority of mutual fund managers spend a lot of their time trading.
ETFs result in less tax. Because of low portfolio turnover and also the way they are structured, ETFs’ investment gains usually are more gingerly taxed than the gains on mutual funds.
Russell
posted by Russell @ 8:28 AM
2 Comments:
At 8:26 PM,
James said…
In your book, on page 14, Keeping up with the Vanguards, you state:
"One of the largest purveyors of ETFs is The Vanguard Group, the very same people who pioneered index mutual funds. In the case of Vanguard (and only Vanguard at this point), shares in the company's ETFs are the equivalent of shares in one of the company's index mutual funds. In other words, they are different class shares in the same fund --- the same representation of companies, but a different structure and slightly lower costs for the ETFs".
VEU want public 6 weeks ago. On Friday, it was trading for 9% more than its opening price. What is causing the price of this ETF to go up? Who is buying it? Are other Vanguard funds buying this fund, to make the fund go up. Why would the fund be trading at more than its NAV ?
How can a ETF track a mutual fund? Isn't the mutual fund suppose to be managed and the ETF is unmanaged? In your book, you state that one can see the stocks that the ETF owns as compared to a mutual fund where one does not see the stocks that the mutual fund owns. Where does one see the stocks that VEU owns? The Vanguard website only shows the top 10 stocks that were owned on 3/31/07.
VEU is suppose to track FTSE All World ex US. Which Vanguard fee pays FTSE to create and maintain the index? Is FTSE really a management company?
When are new shares of VEU issued?
The prospectus of VEU states that Vanguard can change the index the ETF follows at anytime. How can this be?
As you can see, I am confused about how Vanguard's VEU ETF works.
At 8:36 AM,
Allison said…
Russell,
Would you be interested in co-hosting a Basic ETF session for registered financial advisors at Financial Research Associates' upcoming ETF Summit at the end of June in NYC.
Allison Jones Maitlandt
Producer
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