Exchange-traded fund (ETF) and mutual fund fees depends on two things: how you use each product, and through what firms you choose to use them. As with other products and services, firms compete to provide services to you as a consumer. ETFs are more hands-on than mutual funds, so if you prefer that, they can work for you. In both cases, you’ll save yourself more money by doing lots of research before investing.
ETFs essentially work like stocks. If you invest in ETFs, you have the option to buy and sell them as many times per day as you would like. However, like stocks, ETFs carry transaction fees -- so you’ll pay a price for that ease of transfer if you use it. Transaction fees vary depending on the broker you choose to manage your ETFs. Also, any transaction fees you’re charged accrue on top of any fees you may pay to establish and maintain a brokerage account. According to Michael Johnston of the ETF Database, expense ratios for ETFs are usually below 1 percent. If you invest in ETFs but remain passive, rather than actively trading them, the fees you pay over the long term will be quite low.
Mutual Fund Fees
Costs associated with mutual funds vary depending on how actively managed your mutual funds are. Since you don’t generally manage mutual funds yourself, unlike ETFs, the cost of management tends to be higher -- like the cost of hiring a babysitter vs. watching your children yourself. Chartered retirement planning counselor Jeremy Vohwinkle advises that you may pay both buying and selling fees when transacting with mutual funds. Like other fees, these vary depending on the firms with which you do business. If that isn’t enough, Michael Johnston of the ETF Database advises that mutual fund expense ratios are always over 1 percent, and are frequently over 2 percent -- which may seem small now but can add up over time.
In most cases, you won’t have to worry about taxes with ETFs until you sell them. This gives you ample time to plan for your taxes, since you can accurately calculate exactly when you’ll need to pay them. However, mutual funds can declare capital gains distributions whenever they deem it appropriate. If you’ve invested in a particular mutual fund when it makes this declaration and its held in a taxable account, you’ll need to pay taxes at that time. While the amounts you must pay in taxes may or may not be comparable, the ability to plan your financial future may affect the appeal of both ETFs and mutual funds.
Cathy Pareto, a certified financial planner, advises that investing in ETFs is something you should do cautiously. They’ve been available to the market since 1992 -- not nearly as long as mutual funds, which have been around since 1924. Pareto advises only investing in ETFs through firms that have a long and established track record -- not new firms that haven’t had time to prove themselves yet. If a firm suddenly crashes, leading to a surprise liquidation of funds invested in ETFs, you’ll end up with surprise taxes to pay. One other difference between ETFs and mutual funds to consider is the fact that ETFs generally don’t require a minimum investment -- but mutual funds often do. Mutual fund minimum investments can be $1,000, or $5,000 -- or more. If you don’t have that amount of money saved, you can’t invest in those mutual funds until you do.