Are ETFs more cost efficient than mutual funds?
For the most part, ETFs are less costly than mutual funds. There are exceptions—and investors should always examine the relative costs of ETFs and mutual funds. However—all else being equal—the structural differences between the 2 products do give ETFs a cost advantage over mutual funds.
You're tax sensitive
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds.
ETFs have lower costs on average than passively managed mutual funds and don't charge 12b-1 fees. The expense ratio is the cost of the mutual fund, including any management fees, fees for expenses, and 12b-1 fees, and expressed as a percentage of the total assets under management.
ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.
ETFs are generally considered more tax-efficient than mutual funds, owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
ETFs have transparent and hidden fees as well—there are simply fewer of them, and they cost less. Mutual funds charge their shareholders for everything that goes on inside the fund, such as transaction fees, distribution charges, and transfer-agent costs.
The mutual fund operator has since become the second-largest provider of ETFs (by market cap) behind Blackrock. 3 Vanguard's unique cost structure, the economies of scale it has achieved, and the total number of assets under management (AUM) allow it to offer its ETFs at the lowest cost available in the market.
ETFs are generally lower than those that are charged by actively managed mutual funds because their managers are merely mimicking the contents of an index rather than making regular buy and sell decisions, For some investors, the design of a passive ETF is a negative.
Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.
Should I switch my mutual funds to ETFs?
If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.
The single biggest risk in ETFs is market risk.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
One common strategy is to close out positions that have losses before their one-year anniversary. You then keep positions that have gains for more than one year. This way, your gains receive long-term capital gains treatment, lowering your tax liability.
Both have the same expense ratio and similar dividend yield, so you should choose whichever one you prefer based on the fund's strategy. If you only want to own the biggest and safest companies, choose VOO. If you want broader exposure and more diversification, choose VTI.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
You're forced to sell or take liquidation proceeds, which can create a tax burden or lock in investment losses. You may incur a capital gains tax on profits if the ETF's in a taxable account, that is, a non-retirement account. If you owned the fund less than a year, the profit will be taxed at your normal tax rate.
If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
Is S&P 500 a mutual fund or ETF?
Index investing pioneer Vanguard's S&P 500 Index Fund was the first index mutual fund for individual investors.
What's a Good Fee for ETFs? The average asset-weighted expense ratio for passively managed funds was around 0.37% in 2022, according to research by Morningstar. Investors should expect to pay around $3.70 for management costs for every $1,000 of investment value.
Both Fidelity and Vanguard have a wide variety of low-cost mutual funds and ETFs. If you're simply looking at the options offered by each firm, Fidelity has more options available.
Bottom Line. Leveraged ETFs decay due to the compounding effect of daily returns, volatility of the market and the cost of leverage. The volatility drag of leveraged ETFs means that losses in the ETF can be magnified over time and they are not suitable for long-term investments.
VOO and IVV boast the lowest management fee at 0.03%, about one-third of the SPY ETF. While the difference between a 0.03%, and 0.0945% expense ratio may seem trivial, such fees can really add up. For every $10,000 invested, these respective fees equal $3 and $9.45 annually.
