CT Financial Advisor discusses the differences between mutual funds and Exchange Traded Funds.
Almost half of the entire American population owns mutual funds either through their company retirement plan or as part of their personal investment portfolio, according to Statista.com. Yet, Chartered Financial Analyst Tim Baker of Metric Financial in Simsbury, Connecticut, cautions all consumers and corporations that they’re probably not getting their money’s worth with mutual funds and instead recommends Exchange Traded Funds (ETFs), a proven and less expensive investment vehicle with potentially better returns that is becoming the top choice for retirement savings today. Baker is bringing the educational message to a variety of forums for National Financial Literacy Month throughout April.
“Although Exchange-Traded Funds have been available for the past 30 years, they have just recently started gaining in popularity for their low cost and potential returns” said Baker, founder and CEO of Metric Financial, an investment management and financial planning firm. “In addition, they are more tax efficient, which has a direct impact on an individual’s future wealth.”
ETFs are a fund that owns baskets of securities, such as stocks, and bonds, just like mutual funds and both offer ways for investors to diversify their portfolios by owning small amounts of many different companies.
Baker notes, however, that there are several key differences between the two investment options:
- ETFs are much more liquid since they trade on an exchange and can be bought and sold whenever stocks can, while mutual funds can only trade once at the end of each day.
- ETFs are transparent investments: if an investor wants to know what is in an ETF, all holdings are publicly available daily. Mutual funds do not have to disclose holdings and when they do, it usually takes a long time, so the holdings may not be in the fund anymore, producing obsolete information.
- Mutual funds are prone to distributing long and short-term capital gains, while ETFs have a structure that makes capital gain distributions rare, hence lower taxes for the fund owner.
- Mutual funds tend to be actively managed, and therefore have much higher fees associated with them. ETFs, on the other hand, are passively managed to follow a simple index, like the S&P 500, which equates to lower fees. For example, the average actively managed US large cap mutual fund costs 0.7% as compared to 0.03% for an ETF that tracks the S&P 500.
“We’ve been witnessing two major shifts in the investment industry,” adds Baker. “People are trading their high-priced mutual funds for cheaper ETFs and many investors have moved their money into funds that passively track an index and capture returns, as opposed to relying on an active fund manager, who attempts to ‘beat the market’ with superior stock-picking, a method that has proven to be ineffective over time due to human error.”
“The simple fact that there are currently more than 2,000 ETFs in the United States, representing close to $4 trillion in assets, proves that investors are realizing the benefits of a passive investment strategy,” concludes Baker. “While the financial industry benefits from all the dollars that remain in mutual funds, the individual investor benefits from the lower fees and potential superior performance when they move their money to ETFs.”
In honor of April National Financial Literacy Month, Baker will be conducting free, educational seminars on the differences between mutual funds and ETFs to various businesses, professional organizations, community groups and schools. For a full schedule and to register for an event, please visit www.metricfin.com.
ABOUT METRIC FINANCIAL
Founded in 2018, Metric Financial, LLC is registered as an Investment Adviser with the State of Connecticut. Led by Chartered Financial Analyst Timothy Baker, the firm provides investment management services, comprehensive financial planning, debt management, estate planning, retirement planning, risk management and tax planning, among others. Baker conducts frequent educational sessions and public seminars on a variety of financial topics of interest to schools, business groups, and associations. For more information, please visit www.metricfin.com or call 860.256.5895.
PHOTO: Chartered Financial Analyst Timothy Baker is founder of Metric Financial, a Connecticut-based investment management and financial planning firm that offers educational sessions and public seminars on creating and preserving wealth for one’s retirement. Baker and his team work closely with accountants to mitigate his clients’ tax liability and increase their bottom line through passive investment strategies with Exchange Traded Funds (ETFs).
Photo Courtesy of: Metric Financial