Can someone explain to me the pros and cons of an ETF vs mutual fund. All of my 401k, IRA, and after tax brokerage are invested in Fidelity low cost index funds. What would be a reason I would look into ETFs?
Fidelity offers both mutual funds and ETFs to its clients. Both financial vehicles have their advantages and disadvantages.
Mutual funds allow you to pool your money with other investors to buy shares in a fund. This fund is managed by a professional investment company that transacts on your behalf.
However, they trade only once a day, specifically after the market close.
ETFs, or Exchange-Traded Funds, are a type of investment whose price is based on the value of its underlying assets. The prices can change throughout the day as they are bought and sold (just like stocks).
Depends. Do you like auto contributions? Are you in a taxable account or a retirement account? ETFs tend to be a bit more tax efficient for your taxable accounts.
Some people like the ease of auto contributions to mutual funds but with fractional shares, that’s no big deal for me.
I personally go all ETFs but for some it comes down to preference, especially when you’re talking about index funds.
ETFs are going to be more tax efficient since they are less likely to pay out capital gains distributions. They are able to transfer assets using an “in kind” process that prevents the need to pay out gains.
ETFs trade like stocks instead of once per day.
With ETFs, you can use your Fidelity account to invest in other firms funds (such as Schwab or Vanguard) whereas there may be additional fees for investing in mutual funds from those same firms.
So it’s a toss up mostly. I’d definitely opt for all ETFs in a taxable account. I personally use ETFs across all my accounts, it just makes everything easier for me.
With a mutual fund, if you need to sell shares, it will be based on a stock price at the closing bell. ETFs can be sold at your price anytime during intraday. That’s one of the advantages why I prefer ETFs.
ETFs for broker or non-retirement accounts. Mutual funds is fine though for IRAs and retirement accts.
In actuality, there is very little difference between the tax-advantaged ETF and a properly managed mutual fund. I would tend to try to use ETFs in a taxable account, but I would never simply exclude a well-managed and/or well-performing mutual fund just because it isn’t an ETF.
As a buy-and-hold investor, this is my approach: Once you’ve decided on the type of investment you want (for example, S&P 500 index), find the equivalent ETF and mutual fund. Then go with the one that has the lower expense ratio.
I’ve bought 4 types of mutual funds; growth, growth and income, aggressive growth, and international growth. FBGRX, PRDMX, PRDSX, and FDIVX. They have seemed to perform well. Looking to buy ETF’s to make it a little easier if I begin using a different platform outside Fidelity.
The tax efficiency of ETF’s only matter when they’re held in a taxable account, so if it’s in a 401K or IRA there is no tax benefit. Second, when trading on Fidelity if you want to have recurring automated investments, mutual funds are your only options. This can’t be done with ETF’s on their platform.
I personally hold ETF’s instead of mutual funds in my taxable account (for every other account I simply hold mutual funds), and that’s solely for the tax efficiency benefit. Just know that it requires for you to be a little more hands on when it comes to buying more shares, assuming you’re investing on a recurring schedule.
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