Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. Investors can access an ETF with as little as one share, with Charles Schwab offering an initial minimum of just $1. Mutual funds, on the other hand, usually require a minimum initial investment of between $500 and $3,000.
The commission that is paid to the broker when buying or selling ETFs is the same as that paid for a regular order. You can buy the entire index, and the gains of the nation's largest companies that comprise the list, for a minimal amount with either the Schwab S&P 500 (a mutual fund) or SPDR S&P 500 ETF (an exchange-traded fund).
However, they're still subject to the same rules as actively managed mutual funds. If you enter an order to buy the ETF on Tuesday at 10:15am EST and the market is down, you will get the price based on the value of the underlying securities at that point in time as opposed to the end of the trading day like index mutual funds.
Lower fees: Although index mutual funds typically carry higher expense ratios than ETFs, they are much cheaper than actively managed funds. Investment value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Daily holding disclosures make ETF investing more transparent.
You can just as easily get help deciding which mutual funds could help you meet your goals. You don't always have the option to pick between mutual funds and ETFs. Investors can sell short or buy on margin. Being able to buy and sell at any time during market hours is the most differentiating factor between mutual funds and ETFs.
However, there are generally fewer taxable events in ETFs, which means tax liability will typically be lower. 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.
Mutual funds can often be purchased at NAV, or stripped of any loads , but many (they are often sold by an intermediary) have commissions and loads associated with them, some of which run as high as 8.5%. ETF purchases are free of broker loads. Investing in mutual funds allows you to gain exposure to a large number of companies, which can increase your portfolio's diversification and exposure to different markets and sectors.
As ETFs become ever more popular, it is important for investors to understand both the similarities and differences between mutual funds and ETFs. But if minimizing expenses and taxes is important to you, then ETFs might be the better choice. ETFs don't often have large fees that are associated with some mutual funds.
To keep things simple, we'll focus exclusively on index-based funds and ETFs. And ETFs do not have 12b-1 fees. If you're investing a little bit of money each month, as most investors do, these commissions — which range from $4 to $20 — can add up fast. Determining whether an ETF or a mutual fund is appropriate for your portfolio may require an in-depth knowledge of how both investments operate.
However, if you have an ETF vs. mutual fund dilemma, consider the disadvantages of mutual funds, and then consider the index funds advantages ETFs bring to the table. More specifically, the market price represents the most recent price someone paid for that ETF. The tax advantages of ETFs are of no relevance for investors using tax-deferred accounts (or indeed, investors who are tax-exempt in the first place).