What’s in your portfolio?
If you work with a licensed financial advisor, there’s a good chance your portfolio contains two types of common financial instruments: exchange traded funds, or ETFs, and actively managed mutual funds.
Many investors aren’t fully briefed on the distinction between ETFs and actively managed funds, however. According to San Francisco-based financial advisor Daniella Rand, it’s common for prospective wealth management clients to ask about the relative suitability of these two instruments; as Rand and her team walk new clients through the true cost of their existing investments, they’re quick to point out variations in pricing and price structure, as well.
Rand and other well-regarded financial advisors are quick to note that not all ETFs are passively managed, as the “ETFs versus actively managed mutual funds” distinction implies. Still, ETFs are more likely to mirror the performance of specific market or sector indices, rather than beat the performance of those indices (or instruments designed to match them). “While we use ETF’s for our clients all the time, our clients understand that they may be trading in low-cost for market under-performance,” says Rand.
Here’s what else you should know about the distinction between actively managed mutual funds and ETFs.
Mutual funds may not be traded on an intraday basis — that is, when equities markets are open. Instead, they’re traded only at the close of trading, with pricing reflecting the net value change in their underlying components.
By contrast, exchange traded funds may be traded on an intraday basis, just like stocks. In this regard, they’re more liquid than mutual funds, although the practical difference for most investors is not significant.
Most exchange traded funds have low investment minimums, if any at all. By contrast, mutual funds may require substantial minimum investments, often exceeding $1,000.
Fees and Expenses
Passively managed ETFs that simply try to replicate the performance of an underlying sector or index generally have lower fees and expenses than actively managed mutual funds that aim to beat the performance of a sector or index. This does not necessarily mean that ETFs perform better as a class over the long term than actively managed mutual funds; indeed, active management may achieve results that index funds simply cannot match. However, it’s always important to read any financial instrument’s prospectus before proceeding.
You Deserve a Portfolio That Works for You
Choosing between active and passive management isn’t the last decision you’ll need to make as an investor. (To be clear, you’ll need to make that decision multiple times as you build your portfolio, and the answer is different for every investor; for more, speak with a licensed financial advisor.) You’ll also need to make a slew of additional choices to construct and keep tabs on a portfolio that works for your needs and objectives.
At the end of the day, though, every investor wants the same thing: a portfolio that works hard for them. How that portfolio looks will depend on a host of factors and questions to which only you and your financial advisor know the answers. That’s yet another reason to work with a financial professional in whom you have the utmost confidence. Your financial future is too important to have it any other way.