ETF Vs Mutual Funds Pros and Cons – What is an ETF –

hi this is Ryan with our debt-free life’s com today what we’re gonna cover is ETF now ETF stands for exchange-traded funds one of the things that I’d like to point out first is there is the difference between an ETF and a mutual fund and we’ll cover that here in a little bit so the first thing I want to do is just go ahead and explain what a ETF is and then we’ll go through and explain the pros and cons of an ETF so what in ETF is is basically a bundle of a number of different securities usually it’ll range anywhere from low hundreds up to two or three thousand individual securities so it allow you to diversify so with some of the ETF so you

can go through and select a sector so if you wanted let’s say energy if what would happen is you’d look through the difference ETFs and you’d see they’d be made up of different segments so maybe one ETF is focused just on coal as energy the other maybe just energy in general so it allows you to focus on a certain sector if you’d like there’s a number of different types of ETFs again sectors just one of the more common ETFs the other the other type that you’ll see will be for example there’s an ETF for the S&P 500 which basically mirrors the Fudd the S&P 500 one of the things that you’ll notice with ETFs is first thing they are traded throughout the day so unlike mutual funds that have an nav

which is the net asset value which is just updated once after the market closes with the ETF it’s actually updated throughout the day so if you go through and you look at an ETF you’ll notice that it’s moving up and down when the markets open so you’ll see movement throughout the date with it and again unlike a mutual fund it’s going to be just at the close that you’re gonna see that price update on there so that’s the first difference between a mutual fund and a ETF now the next difference is you’ll notice most ETFs have a very low expense ratio and with mutual funds you’re gonna have the expense ratio very significantly so you may have some funds you know after let’s

say you have your front loading fee your operating expense be you may be looking at a total of seven percent whereas with ETFs it’s usually very minimal one of the things that these large financial institutions have been doing is trying to decrease the operating expense for different types of mutual funds to help compete with ETFs so in general the ETF is usually gonna have an Excel or expense ratio now so the next big difference between a mutual fund and an ETF is with an ETF there’s actually no minimum as far as investment goes so with some of the mutual funds you’ll notice you may have a minimum of $2,500 minimum which means unless you’re able to purchase twenty five hundred dollars

worth of this mutual fund you’re unable to invest in it so ETFs allow a lot more flexibility and allow you to purchase shares in smaller quantities compared to some of the mutual funds again not all mutual funds are gonna have that minimum investment requirements and so the next difference between mutual funds and ETFs is actually the additional fees that mutual funds had so a mutual fund may have a front loaded fee or a deferred or back-end fee which means for example with the front-end fee it may be five percent so when you initially purchase the fun mutual fund we’re gonna take five percent for buying into their fund and again any time that you buy multiple so for example if you buy let’s say

Latin America Blackrock so if you buy that fund each time that you purchase more shares you’re gonna have to pay that fee so with the ETF’s the nice thing is you don’t have to worry about that the ETF’s are not going to have those additional fees and again this isn’t for all mutual funds but there are some that are going to have those additional fees and lastly when we look at mutual funds and ETFs with ETFs they’re going to be more tax efficient so overall ETFs in my personal opinion are the best option for most people so if you go with fidelity for example fidelity has these no transaction fees funds that they provide so usually with when you go through a new purchase a

when you go through a new purchase a mutual fund or an ETF you’ll have to pay the Commission which is you know each row company’s gonna have a different amounts so that’s the one ice thing about fidelity’s they do have that as an option but again you have to look at the big picture and so when you’re looking at the big picture you want to take into consideration what are the total expenses that you’re going to be paying in addition to that you can easily add in the Commission per trade so for example if you purchase let’s say a hundred dollars worth of an ETF and you purchase it through fidelity you’ll notice you have a 495 Commission so every time that you purchased that

particular ETF you’re gonna have to pay that now if you have a mutual fund through one of their no transaction fees you can actually purchase that mutual fund there is no Commission so the hundred dollars goes towards that fund so your total cost on the ETF would be one hundred four ninety five whereas with the mutual fund through fidelity with the no transaction fee would be just the hundred so that’s a few things to think about so next what I want to do is go into the screeners for ETF now the ETF screeners are very similar to the mutual funds screeners so we’re gonna go through and we’ll show you the fidelity and then

also Yahoo Finance they both have ETF screeners and again they’re both free available to anybody and everybody as long as you have internet access so we’re going to go ahead and cover that we’ll show you how to select the ETF that’s right for you