ETFs VS. Mutual Funds - Why ETFs are better (2024)

What Are ETFs and Mutual Funds?
Before we break them down into pros and cons, let’s see what each of them is.
ETF is short for “exchange-traded fund”, and these funds are basically securities that you can either sell or purchase through stock exchanges or brokerage firms. They include a wide range of investing options, such as bonds, commodities, and many others. In addition, they come in multiple types, including industry ETFs, inverse ETFs, bond ETFs, commodity ETFs, and currency ETFs.
Meanwhile, mutual funds refer to an investment vehicle. Basically, it’s something that collects cash from investors, after which money is invested in bonds, stocks and others.

What Are the Pros and Cons of ETFs?

• Pros
• You won’t stay in the market for too long if you don't want to. ETFs are very easy to sell and purchase, offering you the chance to come and go throughout the trading day.
• The fees are low.
• There is no minimum holding period when it comes to these funds.
• Through an ETF, you will gain easier access to commodities, gold, emerging stock markets, and many others.
• With this funding type, you’ll have the chance to use bond and stock index ETFs, thus gaining the opportunity to invest your assets.
• Minimum investment is low. (1 share or even partial shares depending on your broker)
• Wide variety of choices.
• Can allow you to leverage.

• Cons
• Funds take 2 days after the trade is executed to be settled whereas mutual funds settle the next day.
• If you have an actively managed ETF, then the fees are going to be higher, but not higher than an actively managed mutual fund.
• Some ETFs only focus on certain industries, which don’t offer as much diversification as you may want. But if that’s the case, you can always buy more than one ETF.

What Are the Pros and Cons of Mutual Funds?

• Pros
• There is a lot of diversification to obtain from them, potentially being beneficial to your portfolio.
• You have a wide variety of offerings.
• A mutual fund is managed by a professional with lots of market experience and knowledge.
• You get liquidity on a daily basis, meaning that as an investor, you can redeem your shares whenever you want.
• You get special access to certain investments, that you might not be allowed to get unless you are bigger in the investing area.

• Cons
• Your portfolio will have a big cash presence because the fund is never fully invested.
• It won’t be as easy for you to make a comparison between funds.
• You will have to deal with commissions, and fees which can be expensive.
• You won’t be covered by an FDIC or CDIC insurance.
• You can’t day trade them.
• Mutual funds often underperform the market (S&P 500).

Our Opinion – ETFs are Much Better
In our opinion, ETF’s are much better than mutual funds. If you are on this page, you’re already an investor who is seeking above average returns. You are an active investor that has an interest in what you own and want to be able to buy and sell whenever you please. Mutual funds are more costly and under perform the market most of the time. Why would you pay a fund manager all those fees to give you below average returns?

With an ETF, you can have broad exposure to the market by buying an ETF such as the SPY that tracks the S&P 500 which will give you exposure to 500 companies. If that is not enough exposure for you, add a bond ETF to the mix. If those 2 aren’t enough, add commodity ETFs to the list! There are many types of ETFs to suit everyone’s needs.

If you are willing to take the risk, ETFs can also allow you to leverage. For example, there are leveraged versions of the SPY ETF. An example of a leveraged ETF is SPXL. This tracks the S&P 500 but exaggerates its moves by 3x. Meaning if the SPY is up 1%, SPXL will be up 3%, and vice versa. Investors definitely need to be careful with leveraged ETFs, but at least the option is there and one buy and sell it as many times as he wants during the trading day.

​If you can’t stand the volatility of the market, there are also low volatility versions of certain ETFs. An example of one is SPLV. This is a low volatility version of the SPY ETF. You will have exposure to the stock market while keeping volatility relatively low. The great thing about these types of ETFs is that they don’t usually underperform the index that they track. In fact, lots of times they outperform it. Below is a chart of SPY’s performance compared to SPLV.