Common Features

Fundamentals of Market Investing by Adam J. McKee

Some standard features of mutual funds and ETFs are described below.  Whether any particular feature is an advantage or disadvantage for you will depend on your unique circumstances—always be sure that the investment you are considering has the features that are important to you.

Professional Management.  Investment advisers who are registered with the SEC manage most funds and ETFs.  Which means that they have to put the fact that they are stealing your money on page 499 of the prospectus.  Do not infer integrity; the SEC does not require integrity, they only mandate disclosure.

Diversification.  Spreading investments across a wide range of companies or industry sectors can help lower risk if a company or sector fails.  Many investors find it less expensive to achieve such diversification through ownership of certain mutual funds or individual ETFs than through the purchase of select stocks or bonds.

Low Minimum Investment.  Some mutual funds accommodate investors who don’t have a lot of money to invest by setting relatively small dollar amounts for the initial purchase, subsequent monthly purchases, or both.  Similarly, ETF shares can often be purchased on the market for relatively small dollar amounts.  You will be given the royal treatment if you can afford to invest in the high minimum investment funds such as Vanguard’s Admiral Shares.  These will be out of reach for years, but as your portfolio grows, be sure to comparison shop for better funds with better fees when you can finally invest the high minimum.  Note that some of the Admiral Shares funds have much lower minimums than others.  Be sure to check.

Liquidity and Trading Convenience.  Mutual fund investors can readily redeem their shares at the next calculated NAV—minus any fees and charges assessed on redemption—on any business day.  Mutual funds must send investors a payment for the shares within seven days, but many funds provide payment sooner.  ETF investors can trade their shares on the market at any time the market is open at the market price—minus any fees and charges incurred at the time of sale.  ETF and mutual fund shares traded through a broker are required to settle in two business days.

Costs Despite Negative Returns.  Investors in mutual funds must pay sales charges, annual fees, management fees and other expenses, regardless of how the mutual fund performs.  Investors may also have to pay taxes on any capital gains distribution they receive.  Investors in ETFs must pay brokerage commissions, annual fees, management fees, and other expenses, regardless of how the ETF performs.  ETF investors may also have to pay taxes on any capital gains distributions; however, because of the structure of individual ETFs that redeem proceeds in kind, taxes on ETF investments have historically been lower than those for mutual fund investments.  It is important to note that the tax efficiency of ETFs is not relevant if an investor holds the mutual fund or ETF investment in a tax-advantaged account, such as an IRA or a 401(k).

Lack of Control.  Investors in both mutual funds and ETFs cannot directly influence which securities are included in the funds’ portfolios.

Potential Price Uncertainty.  With an individual stock or an ETF, an investor can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling a broker.  By contrast, with a mutual fund, the price at which an investor purchases or redeems shares will depend on the fund’s NAV, which the fund might not calculate until many hours after an order has been placed.

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