I had 5 misconceptions about ETFs

I like the idea of ​​index funds – they invest in all companies in an index, such as the S&P 500. You don’t have to choose the right company because when you invest in a single fund, you are basically choosing them. As a young man, I was fascinated by mutual funds. What could be better than buying shares of a mutual fund and depositing my money with other investors according to a certain investment strategy? And, at the time, they were the only fund that could track an index. Then I learned about exchange-traded funds, or ETFs. ETFs are similar to mutual funds where you are buying investment strategies, but you have flexibility in share trading throughout the day. When I first heard about ETFs, I thought these were new discoveries. But the first ETF in the United States was launched in 1993 – 25 years ago! Thinking of ETFs as a “new” investment was one of the first misconceptions I learned!

What is ETF?

If you know about mutual funds, an ETF will be known. ETF Stands for it Exchange business funds. It is similar to a mutual fund in that it is traded on an exchange like a stock. Since you can buy and sell shares throughout the day, you can view the real-time price of the ETF at any time. ETFs and mutual funds are similar in many ways. Just as there are index mutual funds, there are index ETFs. Index funds – both mutual funds and ETFs – are passively managed funds that match the performance of an underlying index. An S&P 500 index fund tries to match the performance of the S&P 500 index, and is one of my favorite passive income investments. There are a lot of misconceptions about ETFs – I know because I’ve trusted them a lot, and today we’re going to dispel some of the biggest ones.

1. ETFs are more volatile

I am a firm believer that you should buy and hold stock investments for the long term. A mutual fund, especially a low cost index fund that trades once a day, Feels Stable Why would I want an ETF whose shares are traded all day long? I don’t want to see prices change in minutes. An ETF is a fund that holds a basket of stocks and bonds that move up and down throughout the day. A mutual fund does the same thing. The only difference between mutual funds is that you can see the price change once a day after the market closes. The share price of a mutual fund changes day by day, as the value of its investment holdings changes – you don’t see that. An ETF is not instinctively more volatile because you can trade it. It just feels that way because you see the price in real time. The volatility of an ETF is based on the securities it holds – if it tracks the same benchmark as a mutual fund, volatility will be comparable.

2. ETF is a “copy” of a mutual fund

I thought all ETFs are exchange-traded versions of existing mutual funds. For the first two decades, this was mostly true. ETFs were all based on existing benchmark indices such as the S&P 500 and Russell 2000. Most ETFs are index funds, but you can get ETFs with a variety of investment strategies. There are ETF versions of your favorite index funds, such as the S&P 500, as well as bonds and stock funds. You can buy ETFs by asset type or sector, such as a healthcare ETF that matches performance across a wide range of industries.

3. ETFs are more expensive

ETF buy-sell To be able to More expensive because they are bought and sold like stocks. Each transaction can be subject to a commission, which is a fee you may have to pay your broker. However, many brokers that offer ETFs allow you to buy and sell some ETFs without commission. (Learn more about the Vanguard ETF3 Fees and minimum commissions aside, when it comes down to it, an ETF, like other financial products, changes in price. An ETF is simply not more expensive than a mutual fund with the same investment objectives that track the same underlying index. I was surprised to discover that, in some cases, an ETF may actually have a lower cost ratio than similar mutual funds. (An expense ratio is the total percentage of funds used for administrative, management, and other costs of running a fund.) As mentioned, no initial investment is required to own an ETF – if you have enough cash in a single share, You can start investing. Mutual funds, on the other hand, may require an initial minimum investment of $ 1,000 or more.

4. ETFs are less tax-efficient

ETFs are traded throughout the day at a rate similar to stocks. I thought this frequent trading activity made them less tax-efficient. In reality it is not. The shares of an ETF may change hands, but do not change the underlying assets. When you buy and sell shares of a mutual fund, the underlying assets of the mutual fund change and the fund must buy and sell securities for this reflection. If there is a significant flow of money in either direction, the mutual fund buys or sells the underlying securities for a change. This activity can create a taxable event. If a mutual fund sells more securities than its original value and realizes a net profit, you (the investor) make capital gains and the tax you can pay when the fund makes a distribution, such as paying a dividend to your account. On the other hand, when you buy and sell shares of an ETF, the ETF does not have to adjust its holding, which can lead to profit and loss. Although an ETF buys and sells its underlying securities as needed, external forces do not affect the ETF as easily as mutual funds do. This makes an ETF more efficient in the same situation.

5. All indicators are made equal to ETF

If you want to buy an S&P 500 ETF, you have many options. The Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 ETF (IVV), and SPDR S&P 500 ETF (SPY) are all ETFs that match the performance of the S&P 500.3 Indicator. However, not all prices are the same. If you review their spending ratios, you will see a big difference. More importantly, if you compare the year-to-date performance of each ETF, they do not exactly match. They don’t even match the benchmark index, the S&P 500’s performance. This difference is known as Tracking error. ETFs use a variety of approaches to match what they track. With an index, most ETFs buy stocks with the index according to the correct weight. The ETF adjusts accordingly, but not instantly, as the index component or weight changes. This can vary in returns based on how quickly the ETF adjusts. You may think a positive tracking error is a good thing because the return on funds is higher than the underlying index. The slightest difference is acceptable, but you don’t want a big difference. The goal of investing in an index fund is to return income in terms of the risky profile of its underlying index. If the fund’s holdings no longer match its respective indicators, you may be exposed to a risky profile for which you have not signed up. It is important to review the ETF cost ratio and tracking error before selecting your ETF.

Why doesn’t everyone buy ETFs?

Much of this is personal choice and how a particular investment product fits into your investment plan and investment style. You can invest in an ETF at a single share price and trade throughout the day, which can make ETFs attractive. But if investing automatically or buying partial shares is preferred, then mutual funds may be a more suitable choice. Whichever investment product you choose, you can increase your chances of success by keeping your costs low, staying diverse, and sticking to long-term planning. I hope I have dispelled some of your misconceptions about ETFs and will consider them the next time you think about your portfolio. There is no right or wrong answer to the question: Mutual funds or ETFs? In fact, it may be worth considering a completely different question: mutual funds And ETFs?


You must buy and sell Vanguard ETF shares through Vanguard Brokerage Services (we are free of those commissions) or through other brokers (which may charge a commission). See Vanguard Brokerage Service Commission and Fee Schedule for complete information. Vanguard ETF shares are not redeemable in any way other than the merger of millions of dollars worth directly with the issuing fund. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or accept the current market price, which may be less than the net asset value.

All investments are at risk, including the potential loss of money you invest.

Past performance is not a guarantee of future returns.

Diversity does not guarantee gain or protect from loss.

Rich and poor3 And S&P3 Has been licensed for use by McGraw-Hill Company, Inc.’s trademark, and The Vanguard Group, Inc. Investment in advice or funds.

Jim Wang’s opinion is not like Vanguard’s.

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