ETFs Are Superior To Mutual Funds For Good Reason

With the plethora of investment tools at one’s hands and the concept of indexing flooding newswires, exchange traded funds and their counterparts are extremely attractive and for good reason.

An alert investment advisor has probably heard of ETFs but doesn’t really know what they offer.  In a nutshell, ETFs offer the ability to be traded intraday on an exchange, unlike traditional mutual funds which can only be bought and sold at the end of a trading day.  They give investors the ability to access hard to reach markets, like commodities, currencies, emerging markets and alternative asset classes.  Some common ETFs that are included in the aforementioned hard to reach markets include the US Oil Fund (USO), which gives exposure to crude oil without having to put up margin requirements, the CurrencyShares Japanese Yen Trust (FXY), the iShares MSCI Malaysia Index (EWM) and the iShares Dow Jones US Real Estate (IYR).   

Additionally, ETFs are open-ended structures which make them liquid and have the ability to be sold short or utilized as a hedging tool.  Furthermore, the vast majority of ETFs are passively managed and track an index as opposed to being actively managed, which generally drives up costs.  When it comes to taxes, ETFs are much friendlier than mutual funds due to their in-kind redemption and creation process, which prevents the trigger of capital gains and the fact that they rarely change their holdings, meaning they rarely have distributions.

Lastly, ETFs offer a characteristic that should be of utmost importance, transparency.  One knows exactly what and how many shares of stocks, bonds, futures contracts or swaps an ETF holds on a daily basis.  As for mutual funds, they are only required to disclose holdings on a quarterly basis.

Granted ETFs carry expense ratios, but they still tend to be lower than the front-end or back-end loads, 12b-1 fees, management fees and other expenses associated with mutual funds.  An investor knows exactly how much an ETF will cost without any hidden fees.  Mutual funds, on the other hands, only disclose costs at the end of the trading day. To add icing to the cake, most ETFs actually move in tandem with their indexes, whereas nearly 75% of mutual funds fail to match the performance of their benchmarks.

ETFs are a growing market and are here to stay.  At the end of the August 2010, global exchange traded products boasted nearly $1.199 trillion in assets with from 159 different providers on 46 exchanges around the world.  Of this, the US ETF industry accounted for 871 ETFs with assets of nearly $715.7 billion from 30 different providers on two exchanges.

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About etftutor
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton. He is contributing author on The Street - his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville. Prior to this, Mr. Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds

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