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Sound Advice: January 31, 2024

Why Exchange-Traded Funds are better choices than Mutual Funds

Exchange-Traded Funds (ETFs) and mutual funds are both popular investment options, but ETFs offer several advantages that make them a better choice for many investors:

1.     Lower Expenses: ETFs generally have lower expense ratios compared to mutual funds. This means investors pay less in fees to invest in ETFs, allowing them to keep more of their returns.

2.     Tax Efficiency: ETFs are structured in a way that makes them tax-efficient. Mutual funds can generate capital gains when the fund manager buys or sells securities within the fund. These gains are typically passed on to investors, resulting in taxable events. ETFs, on the other hand, have a unique structure that allows investors to avoid capital gains taxes until they sell their shares.

3.     Intraday Trading: ETFs trade on an exchange like a stock, which means investors can buy and sell them throughout the trading day at market prices. Mutual funds, in contrast, are priced at the end of the trading day at the net asset value (NAV). This intraday trading flexibility of ETFs provides investors with the ability to react to market movements and news in real-time.

4.     Diversification: ETFs offer diversification by holding a basket of securities, similar to mutual funds. ETFs, however, often track an index, which means they automatically adjust their holdings to reflect changes in the underlying index. This passive management style eliminates the need for active fund management, reducing costs and potential manager risk.

5.     Transparency: ETFs typically disclose their holdings on a daily basis. This transparency allows investors to know exactly what assets the fund holds, enabling them to make more informed investment decisions.

6.     Flexibility: ETFs cover a wide range of asset classes, including stocks, bonds, commodities, and real estate. They also offer exposure to specific sectors, regions or investment themes. This variety allows investors to create a diversified portfolio tailored to their specific investment goals and risk tolerance.

7.     Liquidity: ETFs are traded on major exchanges, providing investors with liquidity. Investors can easily buy or sell ETF shares at market prices during trading hours, ensuring that they can enter or exit their positions without significant price impact.

8.     No Minimum Investment: ETFs do not have minimum investment requirements, making them accessible to investors with various budget sizes. Mutual funds often have minimum investment amounts, which can be a barrier for smaller investors.

Although ETFs offer these advantages, it's essential for investors to conduct thorough research and understand their investment goals and risk tolerance before investing in any financial product. Each investor's situation is unique, and what might be suitable for one person may not be appropriate for another. Consulting with a financial adviser can help individuals make informed decisions based on their specific circumstances and goals.

N. Russell Wayne, CFP

Any questions?  Please contact me at nrwayne@soundasset.com

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