If you are looking to invest for your future and have begun the process of researching strategies for this, you have undoubtedly run across the concept of diversification. As such, you probably know that it’s wise to spread your investments out across different types of elections to both limit your potential for large losses and to gain access to more opportunities for growth. But how do you achieve diversification, short of running yourself ragged researching hundreds of different investment options? For many years, the answer to that question was simple: invest your money in a mutual fund. But in the past few decades another strong alternative has emerged in the form of exchange-traded funds, often called ETFs.
Each of these fund choices gives you diversity through building a basket of investments your money is put toward. However, there are some key difference you should be aware of.
|
Bundle securities to offer diversified portfolios |
Yes |
Yes |
Trade throughout the day |
No (only at end of day) |
Yes |
Higher operating expenses |
Generally yes |
Generally no |
Investment minimums |
Yes |
No |
Commission paid for purchasing the fund (sales load) |
Possibly |
No |
Relatively tax-efficient |
No |
Yes |
Trades trigger brokerage commissions |
No |
Yes |
Appropriate for active trading or dollar cost averaging |
Yes |
No |
Passively managed (indexed) |
Not usually |
Usually |
Depending on your trading style and your objectives, either choice could be right for you. Consult with a tax profession and a certified financial planner for more information on the best choice for your situation and goals. |