Anonymous wrote:there is another big difference no one has mentioned. Tracking for gain/loss. Mutual funds usually have dividends and capital gains which are taxable when you receive them, but also need to be added to basis when you sell the mutual fund (since you now own more shares via the reinvested div/cg). Most investment firms don't actually track this for you. So if you keep mututal funds for a long period of time you need to track this which can be a pain. Which is why none of our taxable accounts are in mutual funds, only ETF's...

First, most firms will track average cost basis for you, and they are required to do so for any shares purchased since 1/1/2012.

Second, nothing about an ETF changes this dynamic. You can get dividends in cash for either a MF or an ETF, in which case there is no change in cost basis. Some ETFs may let you reinvest dividends, but if they do you will have the same cost-basis tracking issue.

there is another big difference no one has mentioned. Tracking for gain/loss. Mutual funds usually have dividends and capital gains which are taxable when you receive them, but also need to be added to basis when you sell the mutual fund (since you now own more shares via the reinvested div/cg). Most investment firms don't actually track this for you. So if you keep mututal funds for a long period of time you need to track this which can be a pain. Which is why none of our taxable accounts are in mutual funds, only ETF's...

A mutual fund that you buy and sell on a securities exchange such as the NYSE Arca.

A "plain" mutual fund would be something that you would buy and sell directly from the mutual fund company itself, not on a securities exchange.

Many, but not all ETFs, track an index. For example, there are ETFs that "track" (try to hold the same stocks as) the S&P 500 Index. By investing in an ETF that tracks the S&P 500, it's kind of like investing in the S&P 500 (obviously not the same thing, but it's a way to try to gain exposure to the performance of the stocks in the S&P 500 Index.

Electronic finds transfer?

Anonymous wrote:Fees on ETFs are lower because they are not actively managed but are automated instead. They track indexes like the S&P 500 and sectors like financials, etc. I prefer them to mutual funds because of the difference in fees.

You can get lower expense ratios on the index funds than in most ETFs. You would need to be careful to determine whether you can reinvest dividends and cap gains without cost, as you can with regular mutual funds. They are often not as diverse, focusing on a particular sector or country. You have to pay to trade, like you would stock, so there are increased transaction fees.

ETF is a tradable mutual funds as stock.

An ETF is a numbers of stocks that have been packaged together in a single security. They get bought and sold like individual stocks, which means you pay a commission on them, and the bid/ask spread can add costs as well. On the other hand as PP notes, ETFs are traded during the day, while mutual funds are settled at the end of the day.

the bogleheads wiki should have some good info.

whether the fees are higher or not depends on the nature of the fund. There are many etfs that have higher fees than many mutual funds.

One big difference is that you can trade etfs throughout the day, whereas you can only place an order for mutual funds for the close of business.

FYI - a lot of money managers are also using the same types of algorithms to track the markets as the ETF's and making decisions based on the same information, so it might be worth it to you to save the fees, if the difference is substantial.

Thank you!!!!

Fees on ETFs are lower because they are not actively managed but are automated instead. They track indexes like the S&P 500 and sectors like financials, etc. I prefer them to mutual funds because of the difference in fees.

Ok, so I feel like a big dummy asking this because I know there are a multitude of definitions on the web, but... I don't really understand them. So could some kind person out there explain to me in the simplest language possible what an exchange traded fund is, and what the difference is between ETFs and regular mutual funds? TIA!!!