Mutual Funds: The ETF and Index Fund

By: Mike Trudeau

Over the last couple decades, mutual funds have been a very popular type of investment vehicle. However, recent publicity has gone to the index fund and ETF funds. ETF and the index fund are really derived from the original mutual fund. You can think of the index fund our ETF fund as a close relative, so to speak, of the traditional mutual fund. So, if they are so similar, why the sudden popularity for these new products?

ETF funds and Index funds have gathered recent popularity for a number of reasons, but probably the greatest advantage that comes with these funds is the relatively low expense ratio. An index fund is not typically actively managed by a fund manager, like you would see in a traditional mutual fund. Actively managed funds are inherently more expensive than their conventional counterparts. Index funds are rather simple, in that they just mock a particular index, and this comes at a considerable discount to a mutual fund that has a team of money managers buying and selling securities. While actively managed funds certainly have their place in the investment world, index funds mocking indexes such as the S&P 500 have often outperformed many money managers. So the thinking goes, that investing in an index fund will not only costs less, but it will often outperform even some of the best fund managers.

Now, the ETF fund has had a rather large following in the last couple years. ETF funds can be purchased directly on the stock exchanges, which puts them at an average when compared to a conventional mutual fund. One reason for this is that ETF funds can prove tax-advantaged for a few reasons. Because the ETF fund is traded on a stock exchange, you the buyer, have complete control of when this particular security is bought and sold, and thus you can control its taxes. Where as, traditional mutual funds offer no such control because a fund manager is actively managing these mutual funds, buying and selling stocks and/or bonds within the portfolio. So, even if you don't sell one single share of your mutual fund, you'll still get hit with taxes since the manager is actively buying and selling within the fund.

ETF funds are a great way for the knowledgeable investor to invest in certain sectors. There are now thousands of ETF funds available, you can invest in just about every single market index or sector there is. If you're interested in a particular country, a particular sector, or even a particular index, ETF funds are a great way to go. They provide you with access to niches that were not readily available in the past. If you want to invest in a particular sector in India for example, it can be done with an ETF fund. But, these funds are just exclusive to global war emerge in markets, they are also handy when you want a focus on a hot sector. ETF funds provided good opportunities for those seeking returns in the real estate market. Not too long ago, when things look like they would never go down. Currently, speculators have profited from the sudden rise in oil, by utilizing ETF funds. These funds also provide the opportunity to go short, when necessary. These short funds, as they are often called allow you to profit in down markets. Though this is considered rather speculative and is best suited for seasoned experts, as money can be lost rather quickly in up markets utilizing these techniques.

It's important to realize that many of these investments, especially sector funds, have a higher degree of risk, as they are not as diversified as the traditional mutual fund type investment. Always do your homework. When investing in any type of security, and don't be reluctant to seek professional guidance. Recent studies show that investors working with an investment adviser are not only have a certain level of comfort, but often see better returns than going at it alone.

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