You have probably heard your friends, colleagues or TV shows talking about ETFs or Mutual Funds and you are left wondering what are they, why are they good and which one is better for me?.
This article assumes that you know How To Trade on the Stock Market
Exchange Traded Funds (ETF):
ETFs are funds that are traded on the stock market that can hold several stocks and are created to mimic the behavior of an index or niche.
An ETF that mimics the S&P500 can have more than 100 different stocks on the fund in order to achieve this, in other words, if the S&P500 index had a 20% growth the last year, then a S&P500 ETF will do its best to achieve a 20% growth in the same period of time.
ETFs fees or management expense ratio (MER) are usually under the 1% of your investment
Similar like the ETFs, this are managed funds that will do their best to mimic and index or niche and unlike the ETFs, Mutual Funds are “traded” by institutions or banks.
Mutual funds MER are usually over 2% of your investment.
So, which one is better for me?
There are 3 main differences between an ETF and Mutual Fund and this are:
- Fees!: Every 0.01% that you pay on MER is money that you will never have back.
- Where can they be bought: ETFs are traded on the stock market so as long as you have a broker, you can buy and sell ETFs shares during regular market hours. Mutual Funds can only be bought on the financial institution who manages the fund
- Minimum required funds: Mutual funds institutions usually required $3,000 or more in order to open an account a buy their funds. If you already have a broker to trade stocks, you can buy as little as 1 share of an ETF which can be worth $20!!!.
Some of you might say: What a terrible comparison, there’s always a fee to buy or sell on the stock market!.
This is true, BUT, there are brokers that will let you buy ETFs for free! An example of this is Questrade , which The Investing Loon uses
How much difference makes fees and MER?
If you have $10,000 to invest with a timeframe of 10 years, and you are not planning to make any contributions (you should make contributions). You could have a ETF Balanced Porftolio with 0.77% MER or a Mutual Fund with a 2.32% MER, it doesn’t look like much difference right?
Lets assume that both had a return (growth) of 7.82%. Well, if you owned the Mutual Fund, after 10 years you would have $16,790 on your bank account, sweet, eh?. Not quite….
If you owned the ETF instead, after 10 years you would have $18,590, which is $1,800 more or 11% than with the same Mutual Fund.
So a difference in fees of 1.55% can make you 11% more in 10 years!!! Now you understand why ETF are so attractive?
If you don’t have a broker buy ETF’s, here at The Investing Loon we use Questrade , and if you register through our affiliate link, we will receive a commission from them, which help us maintain this website
Disclaimer: The Investing Loon is not sponsored by Questrade or any other bank or trader