ETFs are more popular than ever. Are these mutual fund-like vehicles right for you?

You may be hearing a lot of buzz about exchange-traded funds (ETFs). With their very low charges and management fees, ETFs give you a cheap and convenient way to build a portfolio of index funds. The annual expenses of an ETF range from 0.1-0.65%. If you search, you may find an index mutual fund that charges 0.1% - but some charge more than 3%. That can take a pretty big bite out of your returns.

At first glance, ETFs have a lot in common with mutual funds. Both offer shares in a pool of investments designed to pursue a specific investment goal. And both manage costs and may offer some degree of diversification – approach to help manage investment risk – depending on their investment objective. It does not eliminate the risk of loss if security prices decline.

Unlike mutual funds, however, ETFs trade throughout the day like stocks. They can be bought or sold at any time of the market day. Compare that to mutual funds – you can only redeem them at the closing price of a trading day.

There are tax differences, as well. Since most mutual funds are allowed to trade securities, the fund may incur a capital gain or loss and generate dividend or interest income for its shareholders. With an ETF, you may only owe taxes on any capital gains when you sell the security (an ETF also may distribute a capital gain if the makeup of the underlying assets is adjusted, but this is uncommon).

More and more ETFs are finding their way into 401(k) plans – and they certainly make up many of the portfolios we design at Montoya Wealth. As more and more retirement plan vendors and sponsors are being pressured to disclose plan fees, they are starting to welcome ETFs into these programs. 

A qualified financial advisor can help you examine your many options here – there are ETFs to represent nearly any segment or sector of the market. Call 928-460-0972 or email brandon.montoya@montoyawealth.com and we can arrange a time to talk. You can also instantly book an appointment at schedule.montoyawealth.com.

Photo by Christine Roy on Unsplash