Still own mutual funds? You may want to reconsider, especially this time of the year. Mutual funds are a lot like riding the bus versus taking a cab—and when you use Exchange traded funds (ETFs) over mutual funds, the taxi cab can cost a whole lot less. Yes, that’s right—the proverbial investing cab can be cheaper than the bus.
Let me explain; on a bus you pay a fee for the driver to take you somewhere-EXCEPT you are obligated to stop at many other stops along the way (not your stop—other people’s stops)—by the way these stops represent taxes—yep your hard earned cash-ola paid to Uncle Sam. Stay with me here: when you could opt to take a more convenient option, a cab for example, and as is the case in investing, for a fraction of the cost—who wouldn’t opt for a personalized cab ride that’s cheaper than riding the bus? ETFs are the “cabs” of the world—remember all those stops that weren’t yours—these represent all the taxes that aren’t yours. When owning mutual funds, ever year-end you are subject to the mutual fund passing along tax liabilities that may never have even been yours. Unbelievable you must think, but true. With ETFs YOU and only YOU decide when you wish to pay taxes (you only pay taxes when you sell an ETF, and you get to decide when you sell just like in a cab you get to decide where to go), and again, ETFs are typically cheaper than your average actively managed mutual fund.
Basically, an ETF combines the best features of traditional mutual funds (often referred to as open-end mutual funds) and individual stocks with trading flexibility, instant diversification, tax efficiency, and transparency of cost and holdings.
Here’s a great chart on the differences of the two: http://us.ishares.com/topics/know_the_differences.htm As for me, Bam Bam went off to college long ago and took her pet dinosaur with her. ETF’s or bust!