Mutual funds have been the way to invest in the stock market for the average investor for the past century. Individual stocks were too much to keep up with on a daily basis. Mutual funds gave investors a way the most efficient way to diversify among different asset classes. Over the past decade a new challenger has arisen that is gaining in popularity. Say hello to the exchange traded fund. Exchanged traded funds are a growing threat to traditional mutual funds.

ETF’s are great for the following reasons.

Low Fees

ETF’s have much lower expense ratios than mutual funds on average. A good mutual fund will have an average expense ratio of 1%. A good ETF can have an expense ratio as low as 0.20%. Every dollar that is saved from fees is another dollar added to your return. Over a 5 to 10 year time period this can really add up.

No Balance Requirements

Mutual funds have account minimums and balance requirements in order for your account to remain open. If you do not meet the account minimum then you cannot open an account. If you account drops below the balance requirement, your account could be closed or subjected to a low balance fees. ETF’s have no such requirements. You can buy an ETF by just purchasing 1 share. This makes ETF’s much more attractive to regular investors.

Lower Taxes

Mutual funds have fund managers that actively trade their funds much more frequently than ETF’s are traded. Fund managers have to justify fund expenses so they may trade in and out of a position in a given year. This leaves investors subject to higher taxes. ETF’s are traded a lot less than the average actively managed fund. This saves ETF investors from short term capital gains taxes.

Prices Displayed Daily

ETF’s trade a lot like stocks. Their prices can be seen any time during market hours and investors can buy or sell at any time during the day. Mutual funds do not work this way. Mutual funds do not list prices during the day. The Net Asset Value is calculated at 4pm each day. Shares can only be bought and sold after the market closes each day. This is a lot less convenient for investors.

As you can see in the contest of ETF’s vs. mutual funds, ETF’s are the clear winner.