ETFs and conventional mutual funds

Advantages of ETFs over conventional mutual funds.

  1. ETFs are more tax-efficient than mutual funds. Because both ETFs and traditional mutual funds are subject to capital gains tax as well as dividend income tax, ETFs tend to generate less capital gain distributions overall, making them somewhat more tax efficient than mutual funds.
  2. Passively managed ETFs offer considerably lower expenditure ratios than actively managed funds, which mutual funds often are. What causes a mutual fund’s expense ratio to rise? Management fees, shareholder accounting expenditures at the fund level, service fees such as marketing, paying a board of directors, and load fees for selling and distribution are all examples of costs.

A broad-based index is intended to reflect the movement of a group of equities or a market as a whole. The Dow Jones Industrial Average (DJIA) is the broad-based index with the fewest stocks, with only 30 firms included in the index. Other examples of broad-based indexes include the S&P 500 index, the NASDAQ Composite Index, the AMEX Major Market Index, and the Russell 3000 Index.

Peer response

I appreciate the reviewer’s detailed description of the benefits of ETFs compared to conventional mutual funds. The fact that ETF investors can exchange their shares on the market at any moment the market is open is clearly underlined. Mutual funds must wait until the market has closed before investing. You also mentioned that ETF investors may easily access real-time price information by visiting financial websites or phoning a broker. In contrast, the price at which an investor purchases or redeems shares in a mutual fund is determined by the fund’s NAV, which the fund may not compute until several hours after an order has been made.

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