When it come to equity investing for beginners; two types of financial instruments available to the general public. Which are Mutual Fund and ETFs.
What are Mutual Funds?
In the United States, mutual fund is registered with the Securities and Exchange Commission and overseen by a board of directors, to make sure that the fund is managed in the best interests of the fund’s investors. The fund manager manages fund’s investments in accordance with the fund’s investment objective.
Mutual funds provide:
- Professional management
- Service and convenience
- Government oversight
- Less control
- No opportunity to customize
Who should invest in Mutual Fund?
If you are a beginner who does not want to manage your financial investment; Mutual Fund is a way to begin. In my opinion, ETFs is a better alternative because many market researchers say that majority of Mutual funds over the years is underperforming compare to the market return. Before you make an investment decision lets take a closer look on ETFs.
What is ETF?
An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, just like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. In 1993, the first ETF appeared in the United States as the Standard & Poor’s 500 Depository Receipts (SPY), The SPY tracks the S&P 500 index at 10% of its value; SPY has the same component of stocks in the S&P 500 index. For instance, when you do a search on SPY you will see as of today it trading at 129.13 and the S&P 500 index is at 1292.08. In recent years, ETF is increasing popularity, ETFs offer public investors an undivided interest in a pool of securities and other assets similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a securities exchange.
The advantages are:
- easy to manage
- trade as stock
- low cost
The reason I think ETF is a better choice for individual is that the cost is really low, unlike Mutual fund that charge you 1-2 % annually and other service fees, ETF annual expense is around .5%. Now a day many ETFs that track global market or sectors, for example if you want to invest in energy companies you can purchase Energy SPDR – XLE. XLE’s holding are energy companies that primarily develop and produce crude oil and natural gas, and provide drilling and other energy-related services. Leaders in the group include ExxonMobil Corp., Chevron Corp, and ConocoPhillips. ETF is a very flexible alternative to mutual funds; you have more control on your investment. You can allocate your money through various ETF for diversification and the cost expense is the same as buying a stock which somewhere under $10 depend on your broker.
Here are couple of popular ETF family:
I believe ETF is a great way to invest for those whom just start out; if you do not want to pick your own stock portfolio just invest in SPY, it contain 500 companies and your return will be equal to market return. As I have mention earlier, majority of Mutual fund’s return are underperforms compare to the market why you pay 1-2% fee extra for it. I know 1-2 % is not a lot of money, imagine you invest for 20 years that small difference will be very significant for you retirement. A 2% difference in return compound 20 year will earn you 50% more money in your retirement.
In the end, I hope all of you enjoy my writing and leave me some comments. What kind of investment vehicle you are using? How your investments perform in the past? I wish we can build a great community to learn from each other. Mean while good luck to you all.