For the knowledgeable, active investor who wants to participate in big picture trends, the Exchange Traded Fund (ETF) has many advantages over the traditional Mutual Fund. ETFs are far more transparent, efficient and economical.
Be A Control Freak.
You know it’s true: the only person who really cares about the health of your portfolio is you. Using Mutual Funds to increase your net worth is like depending on the school cafeteria to improve your kids’ diet. They act in their own self interests which are influenced by a lot of political elements you’ll never be privy to.
Sector specific Mutual Funds are often managed by younger, inexperienced staff. They’re looking to prove their worth to the fund family and your well-being may or may not serve that goal. The larger funds are managed by experienced managers who have alliances and interests unknown outside their companies. In addition, your buy and sell orders can only be filled at the daily open price. Intraday fluctuations do not show up in the fund’s price.
The stocks within the ETF are the only influences moving it. You need not be concerned with outside influences effecting the funds manager. Outside the unusual events of bankruptcy, mergers and delising, the ETF contents will hold steady. You also have the power to buy/sell/exchange at any point during the day. If you see news that will effect a fund that you want in or out of you can go ahead and buy/sell/exchange.
Knowledge is Power.
As an active trading investor, you follow the markets and keep abreast of the political and economic trends. Why would you want to turn over the power to act on that information to a third party Mutual Fund manager?
Fund Managers control the amount of information that is shared with clients, only allowing a legal minimum to go out to them. They have the power to change the focus of the fund and changes positions at their discretion without notifying you. That along with “window dressing”, giving an illusion of holding the quarterly winning stock scan result in buy high/sell low actions.
Transparency is built into ETFs. They establish their holdings and are committed to retaining them. You know at all times what you own and you can clearly see the results of your decisions to buy or sell the fund. There’s no need to dress-up a quarterly statement for reporting.
Taxing Issues.
Mutual Funds change positions with no regards to each share-holders tax situation. They might buy to put new money to work or sell only to meet redemptions. This can produce short term gains that will elevate your tax burden. Phantom gains can also be a problem. These are caused by a end-of-year capital gains distribution. You are left paying the taxes. With ETFs this is much less likely.
ETF trades are controlled by you. If you decide that delaying a sale will move your earnings to a lower tax bracket, that risk is yours to take. New money or recycled money, can be invested according to your best interest without being controlled by cash holding limits. You can access current information about your portfolio at any time, such as your taxable earnings. Which simplifies tax planning greatly.
Lower Fees and More Options.
If you want to control assets not own them, look to individual securities and EFTs. With traditional Mutual Funds that is not an option. With Mutual Funds, you also pay management salaries and bonuses even when labeled “no load”, you just don’t see them. These unseen expenses are taken out before your earning are posted in your account, making your gains even smaller.
ETFs have extremely low fees because no manager needs to be making adjustments to the fund’s holdings – and no wondering what went out the back end. For active traders who want to look at the big picture instead of betting on individual company’s ability to produce returns, the ETF is far superior to the old fashioned Mutual Fund in just about every way.
The Set-it-and-forget-it mentality, allowing fund managing pros make the decisions about where the money goes, will be working years longer than the person who takes care of his own accounts using EFTs and a trading system that has passed all the tests. When you leave it to the pros, you pay them for the privilege with your profits.