| Much like the enduring question, regular or diet in the | | | | gains. |
| soda world, stands the classic investor quandary: | | | | The timing of your ETF trades, and therefore the |
| Mutual Fund or Exchange Traded Fund? Of course | | | | gain or loss, is strictly up to you. If waiting a few |
| there are no easy answers to this new age question, | | | | days or weeks to sell will shift your earnings into a |
| but I do believe there are at least ten powerful | | | | lower tax bracket, you can choose to take the risk |
| reasons that you should be using Exchange Traded | | | | and wait. Unexpected capital gain distributions are far |
| Funds or ETFs instead of Mutual Funds: | | | | less likely with an exchange traded funds as |
| 1) Manager experience or bias - The larger Mutual | | | | redemptions are generally handled in-kind for larger |
| Funds are generally managed by experienced | | | | investors and the lowest cost basis stock in |
| managers who have alliances and interests unknown | | | | transferred out first to these same in-kind investors. |
| outside their companies. Sector specific Mutual Funds | | | | 5) Portfolio Turnover - We mentioned Mutual Fund |
| are often managed by younger, inexperienced staff. | | | | turnover is generally very high. ETF turnover for |
| These managers are looking to prove their worth to | | | | redemptions, rebalancing or corporate actions is |
| their fund family and your well-being may or may not | | | | generally handled in-kind to the extent possible. Here |
| serve that goal. ETFs, on the other hand, attempt to | | | | again the ETF is generally much more tax efficient. |
| achieve a benchmark index return by holding all the | | | | 6) Options - No options exist for traditional Mutual |
| positions in the index, no manager bias are involved. | | | | Funds. The opportunity to control assets without |
| 2) End of Day Pricing and Trading - Mutual Funds are | | | | owning them only exists for individual securities and |
| priced at the end of the trading day only and your | | | | the ETFs that own baskets of stocks. ETF investors |
| buy or sell order is processed at this end of day | | | | can write option contracts on just about all ETFs with |
| price. ETFs allow for trading throughout the day, just | | | | an established trading history. |
| like any other stock. | | | | 7) Stop or Limit Orders - Mutual Funds do not allow |
| 3) Transparency - Mutual Funds restrict their | | | | you to set a stop loss or place a limit order at a |
| transparency of positions to the legal requirement of | | | | particular price. If you want to sell you must wait until |
| quarterly position reporting. Since this transparency is | | | | the end of the day and take whatever the closing |
| delayed and infrequent, it leads to a phenomenon | | | | price is for the fund's holdings. ETFs can be bought or |
| known as "window dressing" whereby the fund buys | | | | sold throughout the trading day, either in a direct |
| all the quarter's winners to appear to have held the | | | | purchase or sale or via a limit or stop order. |
| winning stocks for the quarter. ETFs positions are | | | | 8) Shorting - Mutual Funds cannot be sold short, nor |
| known and do not change except when there are | | | | do most Mutual Funds have the ability to short equity |
| changes in the underlying index components. There is | | | | positions. ETFs on the other hand can be |
| no ability to hide portfolio positions or dress up a bad | | | | marginalized, sold short or used to hedge risk in a |
| portfolio. | | | | portfolio. |
| 4) Taxation - Mutual Funds buy and sell positions | | | | 9) Margin Purchases - ETFs can be purchased on |
| unrelated to the tax implications for individual share | | | | margin; Mutual Funds cannot. |
| holders. They may sell to meet redemptions and buy | | | | 10) Fees - Mutual Fund fees are generally higher than |
| to put new inflows to work. This often results in | | | | passively managed ETFs fees. ETFs have extremely |
| short-term gains that increase your tax burden. End | | | | low fees because no manager needs to be making |
| of year capital gains distribution may also cause you | | | | adjustments to the fund's holdings on a frequent |
| to be "credited" with fathom gains related to a period | | | | basis. Additionally, ETFs do not pay hidden expenses |
| of time you may not even have been a share holder | | | | such as 12b-1 marketing fees. |
| or for positions that have large unrealized capital | | | | So as you can see there are ten good reasons why |
| gains. Also capital losses do not pass through to | | | | you (or your advisor) should be using ETFs in your |
| share holders to the extent they exceed capital | | | | investment portfolios. |