One of the most common and discussed questions we face when it comes to investment funds is: "What are the main differences between exchange traded funds (ETFs) and mutual funds?"
Both provide a type of investment fund and provide investors with the opportunity to exhibit in a basket of securities, but there are important differences between the two structures, mainly in terms of: * Transparency, * Trade, * Tax efficiency
The first key difference between an ETF and a mutual fund is transparency. The assets held by exchange-traded funds are published daily, so that every investor knows exactly what he owns.
Mutual funds publish their assets once a quarter, often with a one-month delay. Thus, when a mutual fund publishes its holdings, they may already be quite different.
In addition, exchange traded funds are much more transparent in terms of trading costs. The buyer or seller of units in the ETF bears the costs of trading without affecting other investors in the fund.
In addition, the trading costs associated with investing in an ETF are in the form of a spread and a commission that the buyer or seller pays. Whereas in the case of mutual funds, the costs of inflows and outflows are borne by all unit-holders in the fund and thus affect the potential return.
In terms of fees, mutual funds also have additional burdens such as fund manager fees, marketing and other costs, which are not always transparent enough. Many investors believe that they receive a net asset value (NAV), but in reality this is the value minus the unknown trading costs.
The second key difference between the two products is their trade. A mutual fund investor can only receive the net asset value minus the mutual fund costs at the end of each day. At the same time, an ETF can be bought or sold throughout the trading day. In addition, as the ETF is traded on an exchange, this adds an extra layer of liquidity.
ETF shares can be transferred without a transaction in the underlying securities. This can potentially lead to lower costs compared to trading the main basket. This possibility does not exist when investing in mutual funds.
The third key difference between mutual funds and ETFs is tax efficiency. While both structures are often taxed equally at the individual level, the main difference is at the fund level.
At the end of the year, if the fund has net profits from the sale of securities, this amount must be distributed to the fund's shareholders, who are then obliged to pay taxes on this distribution. In most cases, ETFs are more efficient in terms of taxes at the stock level due to their exchange nature.