ETFs are one of the hottest trends in investing right now, and many people are using them to replace mutual funds. Should you jump on the bandwagon, too?

An ETF is kind of like a mutual fund that trades like a stock—you can trade them throughout the day—whereas mutual funds update their price only once per day. And that’s actually one of the biggest criticisms against ETFs because people are using them to try and time the market—to the detriment of the investor.

Now why is the investment industry falling over themselves with these products?

Well, for one, the management fees tend to be a little bit lower than the same type of a mutual fund. The difference in management fees is minuscule, but it makes a great marketing point for the investment companies: “We’ve got the absolute lowest expenses to the exclusion of everything else,” they say.

Another problem with ETFs is that they can’t capture all areas of the market as efficiently as a mutual fund can. Now, some areas of the market are just fine, but there are areas like small and value where we want smaller companies, but a cap weighted ETF can be problematic because it’s weighting based on the size of the company. They’re over-weighting big companies, which doesn’t allow us as high a degree of diversification as we would like.

There can be some tax advantages with ETFs that can be helpful, depending on your situation, but you have to watch out that the disadvantages don’t outweigh the advantages when it comes to these investment products. So, go in with eyes wide open and understand the difference before doing anything.

 

If you’d like to talk with one of the Paul Winkler, Inc. advisors personally about your portfolio diversification and plan, we’d love to chat. Schedule a free call with us here.

Of course, you’re welcome to just come on in to our office when you schedule an in-person meeting here.

 

Written by Paul Winkler

*Advisory services offered through Paul Winkler, Inc. (‘PWI’), a Registered Investment Advisor. PWI does not provide tax or legal advice: Please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase or sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.