Technically speaking, an exchange traded fund (ETF) is one type of mutual fund. However, traditional mutual funds are structured very differently than ETFs, and each comes with its own advantages and disadvantages. If you're unsure which is best for you, consult with a financial adviser to determine which type of fund meets your short-term needs and long-term goals.
Minimum investment costs for mutual funds may be a bit steep for many investors. As noted by Kiplinger, many mutual funds have a minimum initial investment of $2,500 or much higher. If you have the cash to invest, a mutual fund is usually well worth the initial high cost. ETFs, on the other hand, have much lower minimum costs. However, keep in mind that ETFs also have brokerage fees that can make the investment a bit less lucrative.
Traditional mutual funds and exchange traded funds are priced quite differently. For traders, ETFs offer a few advantages. Share prices change throughout the day, which allows for trading to take place throughout the day. ETFs can also be short sold, which may also appeal to traders and stock speculators, although they are not crucial for long-term investments. The price of traditional mutual funds, on the other hand, is not determined until the close of the day.
ETFs have a few disadvantages, particularly to amateur and long-term investors. ETFs that track small, marginal stock companies, such as, for example, emerging nanotechnology companies, are riskier than other ETF investments, such as treasury funds and established corporations. And although the ETFs pricing structure can be beneficial for experienced traders and speculators, it isn't necessarily an advantage for beginners. According to Kiplinger, ETFs are also prone to incorrect tracking, which is most common when the ETF company doesn't actually own the commodity it tracks. To avoid this pitfall, only purchase commodity ETFs that actually own their corresponding commodity, or opt for ETFs that buy shares in leading companies.
Mutual Fund Disadvantages
Although mutual funds may be more traditional than ETFs, they are becoming less popular due to lower gains in recent years. New ETFs appear at a rate of about one each day, according to Kiplinger, and since their introduction in 1993, they have gained about $1 trillion in assets. ETFs also have tax benefits that mutual funds do not, in addition to lower costs. Nevertheless, mutual funds remain one of the most popular investing options and are particularly well-suited for those who are new to investing and trading.
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