The Investing Question You're Probably Trying To Answer Right Now...

posted on 06-07-2019

When I first decided that these super-popular investments might have a place in my portfolio, I spent about six months learning about them and then another six months investing in them to determine how I wanted to use them in my portfolio.

I'm definitely not alone in looking into them. Thousands of Americans have asked themselves the same question I did, and many others are considering their answers right now.

But the reality is that it can be a little overwhelming to decide on your final answer. After all, your decision could mean moving away from an investment that's been the cornerstone of your portfolio -- as well as the portfolios of millions of other Americans -- for years.

So what's this burning question?

Mutual Funds Or ETFs?

There are many different things to consider, such as tax treatment, costs and legal structure. Looking back at what I have learned, I have decided it comes down to three factors you should consider when deciding which one is right for you.

Let's look at each of these...

1. The Purpose Of Your Investment

First, understand the purpose of your investment. Is it a long-term core holding that you are not going to be trading out of? Is it a market play? Are you looking to just get in and get out? Is it a temporary allocation that you might want to adjust within the next year or two?

How you answer these questions is crucial. And if you haven't answered them yet, then you should do so, before you move on.

2. How You Plan To Buy The Investment

This one is crucial as well. Are you using a lump sum to get in the market, or are you investing on a regular monthly basis?

Additionally. are you going to reinvest any dividends, or do you just want the cash? Reinvesting dividends is a key part of the investment strategy for many investors.

After you know what the purpose is and how you are going to buy, then you can begin to narrow in on a decision.

First thing to consider is liquidity issues. If you are investing in a thinly traded area such as an individual country investment, you might not have as much liquidity in an ETF as you would in a mutual fund. Since an ETF is traded like a stock, you will need to have someone on the other side to buy, thus when the market is down, it could be hard to find a buyer. Meanwhile, a mutual fund will typically have the cash on hand to buy your shares.

3. Costs 

Costs can destroy your return; evaluate every possibility. When looking at your two investment options, two fees come into play: transaction fees to purchase and management fees. Using the information that you determined on your purpose and how you are going to buy, come up with an estimated cost per each type of transaction.

For example: An ETF will have a transaction fee to buy the shares plus a management fee. This might look like $7.95 per trade plus .06% per year and a sales transaction fee of another $7.95. Meanwhile, your mutual fund might have no transaction fee and a management fee of 1.25%.

Don't forget fees for reinvesting dividends and mutual fund loads. Both of these will cost you more money if you need to pay to reinvest the dividends or get hit with a sales fee. (The fee for reinvesting is different for every brokerage company, so ask.) Tally all the costs for each approach and select the cheapest long-term option.
   
For example, if you are going to use a lump sum of money to add to your core index holdings that you will keep for at least 10 years, an ETF will allow you to pay one fee to get in with a much lower yearly management fee. That makes your costs less than a mutual fund's fees, which would have no upfront transaction fees but would come with a higher management rate over the long term.

However, if you prefer to have your dividends automatically reinvested and your brokerage won't reinvest for free, then you might want to go with the index mutual fund that will automatically and for free reinvest the dividends. 

The Investing Answer: One final thought: I use the dividends from my ETF products to rebalance my portfolio; that way, I avoid automatic transaction fees. If I have to buy and sell to balance my portfolio, I transact two fees. However, if I use my dividends to change my allocations, I avoid the sales fee and just pay to buy.

by Christian Hudspeth What's even better than earning rewards for spending on your credit cards? Getting paid hundreds of dollars worth in sign-up bonuses in three months or sooner -- just for tr...
by Christian Hudspeth Tired of dragging credit card debt around with you? Taking 15 minutes to transfer your debt to a credit card with generous balance transfer perks could save you thousands in...
by Christian Hudspeth If you're going to spend money anyway, then why not get paid for it?Whether you're looking for credit cards with up to 6% cash back, double flight miles, or even a free hote...
by Christian HudspethIn times where interest rates are on the rise, you may start hearing financial advisors and bankers sing the praises of an income strategy called "CD laddering" (short for ce...
by Susan Campbell Those of us familiar with selling property know real estate agents don't come cheap. With real estate agent commission and fees amounting to as much as 6% of the sel...
Beverly Harzog is a nationally recognized credit card expert, author, and consumer advocate. She blogs about credit cards at BeverlyHarzog.com. Being in credit card debt is the pits. I've bee...
by Christian Hudspeth If you haven't already felt the pressure to refinance your mortgage, you're probably really feeling it now. Mortgage rates are still hovering near historic lows. But ...
by Christian Hudspeth If you or someone you know is thinking about getting a home mortgage, you may want to know about the thousands of dollars in hidden charges that some lenders are quietly...
by Christian Hudspeth Money market accounts (MMAs) and savings accounts make great places to set aside your emergency fund money and earn some interest income at the same time.Simply put, these s...
by Christian Hudspeth It's true that auto loans and home loans offer attractively-low annual percentage rates (APRs), while credit cards offer borrowing power without the risk of ever seeing the ...
by Christian HudspethWant to keep your emergency fund safe while earning interest yields that are three to five times higher than a typical savings account? Putting your money into an FDIC-insure...
by Christian Hudspeth Question: Hi there. I need your advice. I'm only 19 and I really need to start investing. Where can I start? -- Tirelo M., Gaborone, Botswana Answer: You've defini...