Which is Better - Mutual Funds or ETFs?

When it comes to investment options, people have a lot of choices. Two main options that have gained popularity in recent times are mutual funds and ETFs. If you are new to both and want to know which is better, mutual funds or ETFs, read on. Here we have tried to simplify it for you.

What are Exchange-Traded Funds (ETFs) and How They Differ from Mutual Funds

Exchange-traded funds, abbreviated as ETFs, trade on exchanges just like common stocks. The only difference is that on the other side of the trade is a layman investor, not a fund manager. Anyone can buy and sell at any point during a trading session at the current price. It’s not mandatory to do that at the end of the day. Also, there is no minimum holding period. So, they can reflect the new market reality faster than mutual funds.

Another way ETFs differ from mutual funds is that they are index-tracking and try to match the price movements and return of an index. They do that by assembling a portfolio that matches the index constituents as closely as possible.

With ETFs, the managers have less to do as the buyers and sellers are doing business with one another. So, the effort and fee attached to managing ETFs are less than mutual funds. The ETF structure also leads to better tax efficiency as compared to mutual funds (that are taxed each year). In ETFs, the tax will be there only if and when a person sells the shares.

What are Mutual Funds and How They Differ from ETFs?

Mutual funds are usually managed by a company directly or via a brokerage firm. The purchase of any mutual fund is executed at the net asset value of the fund based on its price when a market closes. If you place the order after the market is closed, the price is what it’s on the next day. When a person sells their shares, the process occurs in reverse. Try not to sell too fast, as you might need to pay the penalty (especially if you sell within 90 days).

Most mutual funds are actively managed, which means spending money on industry research, analysts, economic research, company visits, and much more. So, they are more costly than ETFs.

Which is Better?

There is no short answer that suits all. Which is better for you- ETFs or mutual funds depends on what you need and expect. Mutual funds are a good option when investing in obscure niches like stocks of smaller foreign companies or areas like long/short or market-neutral equity funds that feature esoteric risk/reward profiles.

For investors who want to keep things simple, ETFs are a better choice as they have low cost, easy access, and focus on index tracking. They help you get exposure to different market segments and help you fulfill the goal of accumulating long-term wealth with a balanced and broadly diversified portfolio.

Read about top-performing mutual funds in Canada here.

Learn about the best ETFs in Canada here.



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