When deciding whether to invest in ETFs or mutual funds, it may help to know whether you're an active or buy-and-hold investor.
Each financial product comes with its own unique set of advantages and disadvantages. But these aren’t solely attributable to the product itself. They also have a lot to do with the individual investor—namely, how he or she uses the product.
This scenario is especially true when comparing exchange-traded funds (ETFs) and mutual funds. Suppose you’ve gone over the basic features, noted the main differences, and mulled over the pros and cons of each product, but you still can’t decide between the two.
What if you approached the problem from a different angle, one that focuses less on the products and more on your own preferences and tendencies as an investor? You might want to begin by asking a simple set of questions: “Am I more of a buy-and-hold investor or an active participant and which products—ETFs or mutual funds—might better align with my investment style?”
In case you’re not familiar with either term, here’s a brief description.
Assuming you’re familiar with the features that differentiate ETFs and mutual funds, let’s see how both products might enhance or limit the tendencies inherent to both general investment styles. Here’s the skinny:
ETFs for the Buy-and-Hold Investor
Many ETFs are indexed to a benchmark, making them a popular choice for the self-directed buy-and-hold type of investor. The products are also flexible enough to provide both concentrated and diversified index exposures. Plus, TD Ameritrade clients can access over 300 commission-free ETF products offered by eight leading providers.
Caveat: If you don’t feel you have the discipline to stay the course during periods of market volatility, then perhaps a do-it-yourself approach to buy-and-hold investing might not be the best fit.
Mutual Funds for the Buy-and-Hold Investor
As they may be inclined to do with ETFs, buy-and-hold investors may focus on index-based mutual funds. Other mutual funds allow you to benefit from the services of a professional fund manager, whose job is to know the ins and outs of constructing and rebalancing a portfolio. Fund managers apply their knowledge and understanding of markets and market sectors in the context of the economic conditions to attempt to optimize the portfolio mix within the confines of the fund’s objectives. TD Ameritrade clients can access more than 13,000 mutual funds, including several hundred no-transaction-fee (NTF) mutual funds.
Caveat: Professional management costs money. In addition to paying management fees, you may also end up paying a larger tax bill, in the case of funds with high asset turnovers. This can erode your principal invested.
ETFs for the Active Trader
Because of their intraday trading flexibility, lower fees than managed mutual funds, and range of market exposures—from narrow to wide—ETFs generally are considered by the active participant.
Caveat: Active trading can be difficult and tricky. It often entails timing the market, which can be challenging at best and can lead to missing opportunities, not to mention additional transaction costs. And those commission-free products? Because they’re typically meant for buy-and-hold investors, they are typically subject to minimum holding periods.
Mutual Funds for the Active Trader
Mutual funds can only be bought and sold at the end of a trading day, at the daily net asset value (NAV). Considering this lack of trading flexibility, mutual funds might not be inherently compatible with a more active investment approach. Many investors thus view mutual funds as long-term investment products.
Caveat: Clients do not pay a load fee for most mutual funds available on the TD Ameritrade platform, and many come with no transaction fees. Plus, many employer-sponsored plans allow participants a certain number of transactions per month for free, for those interested in rejiggering their investment lineup. So if you’ve considered all the variables and are leaning toward mutual fund investing, the once-a-day valuation shouldn’t necessarily deter you from choosing mutual funds, even if you plan to take a more active approach.
When deciding between ETFs and mutual funds, consider your investment style. And of course, consider whether your investment style and product of choice aligns with your overall investment goals, financial resources, and risk tolerance.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Carefully consider the investment objectives, risks, charges, and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.
Mutual funds are subject to market, exchange rate, political, credit, interest rate, and prepayment risks, which vary depending on the type of mutual fund.
Diversification does not eliminate the risk of experiencing investment losses.
ETFs can entail risks similar to direct stock ownership, including market, sector, or industry risks. Some ETFs may involve international risk, currency risk, commodity risk, and interest rate risk. Trading prices may not reflect the net asset value of the underlying securities. Commission fees typically apply.
Particular commission-free ETFs may not be appropriate investments for all investors, and there may be other ETFs or investment options available at TD Ameritrade that are more suitable.
TD Ameritrade receives remuneration from certain ETFs that participate in the commission-free ETF program for shareholder, administrative and/or other services.
No Margin for 30 Days. Certain ETFs purchased commission free that are available on the TD Ameritrade ETF Market Center will not be immediately marginable at TD Ameritrade through the first 30 days from settlement. For the purposes of calculation the day of settlement is considered Day 1.
Short-Term Trading Fee (Holding Period for 30 Days). ETFs available commission-free that participate in the ETF Market Center may be subject to a holding period that commences with any purchase and extends through the following THIRTY (30) calendar days. An account owner must hold all shares of an ETF position purchased for a minimum of THIRTY (30) calendar days without selling to avoid a short–term trading fee where applicable. There is no limit to the number of purchases that can be effected in the holding period. Any order to sell within THIRTY (30) calendar days of last purchase (LIFO – Last In, First Out) will cause an account owner’s account to be assessed a short–term trading fee of $13.90 where applicable. For the purposes of calculation the day of purchase is considered Day 0. Day 1 begins the day after the date of purchase. The short–term trading fee may be applicable to each purchase of each ETF where such ETF is sold during the holding period. The short–term trading fee may be more than applicable standard commissions on purchases and sells of ETFs that are not commission-free.
TD Ameritrade does not provide tax advice. Clients should consult with a tax advisor with regard to their specific tax circumstances.
No-Transaction-Fee (NTF) mutual funds are no-load mutual funds for which TD Ameritrade does not charge a transaction fee. TD Ameritrade receives remuneration from mutual fund companies, including those participating in its no-load, no-transaction-fee program, for record-keeping, shareholder services, and other administrative and distribution services. The amount of TD Ameritrade’s remuneration for these services is based in part on the amount of investments in such funds by TD Ameritrade clients. Almost all funds held 180 days or less will be subject to a short-term redemption fee of $49.99. This fee is in addition to any applicable transaction fees or fees described in the fund’s prospectus.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, and a subsidiary of TD Ameritrade Holding Corporation. TD Ameritrade Holding Corporation is a wholly owned subsidiary of the Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 Charles Schwab & Co., Inc. Member SIPC.