In my years as a financial advisor, I have almost completely invested my clients' funds in mutual funds. In my opinion, one of the strengths of mutual funds is diversity. However, I have been vigilant [sometimes even discouraged] about mutual fund spending, turnover and year-end capital gains. Another reason why I chose mutual funds is because even as an experienced consultant, I have never claimed to be the authority to choose stocks. However, I have always liked investors to choose the price they buy or sell stocks through limit orders and options. This is also true to me, but neither orders nor options can be used with funds. Until a few years ago, I often wondered how investors could gain diversification, tax efficiency, transparency, and the ability to use a limit order to buy or sell an investment. All in one investment? The answer is: Exchange Traded Funds [ETFs].
Mechanisms for mutual funds and exchange-traded funds
Mutual Fund It can be "open" [unrestricted stock issuance] or "closed" [issued limited stock]. For the purposes of this article, open-end funds will be discussed.
The fund was born from a professional portfolio manager or fund management team. The portfolio manager or fund management team pools funds from different investors and creates investment trusts. Funds from the trust are invested in stocks, bonds or cash. Investors buy stocks of the fund in net assets [net asset value]. As investors invest more money into the fund, they create additional mutual fund shares. Investors do not choose stocks in mutual funds, which is the responsibility of the portfolio manager.
When a fund investor sells [redeems] its stock, the stock is returned to the portfolio manager [investors exchange cash for their stock.] If the mutual fund does not have enough cash to accommodate the investor' sale order, then the portfolio The manager may have to sell the fund's securities to raise cash. This may affect all shareholders of the fund.
Exchange-traded fund Built in a way that contradicts mutual funds. Although the birth of mutual funds began with cash [from investors] and later invested in stocks, ETFs actually came from stocks. Once the "expected" ETF is approved by the US Securities and Exchange Commission [SEC], the ETF sponsor [issuer] will enter into an agreement with the authorized participant. Authorized participants are usually large institutions, market makers or experts.
Authorized participants borrowed stocks and placed them in the trust and used the stock to form the ETF's founding unit [a unit of creation of approximately 50,000 shares]. Authorized participants are granted shares in the ETF [representing a slice of the created unit] in exchange for stock placed in the trust.
After the authorized participants acquire ETF shares, they are subsequently sold to the public on the open market.
Unlike funds that are priced at the end of each trading day, ETF stocks are priced the same as stocks until the trading day. ETF stocks can be purchased through limit orders or options.
Unlike mutual funds, redemption does not affect other ETF investors when investors want to redeem their ETF shares.
ETF shareholders who want to redeem their shares can sell them on the open market, or if they have enough ETF stocks [usually in the case of large companies], then these stocks can be replaced by creating units. Create units to exchange related stocks. Because the exchange of the creation units of the relevant stocks is similar to the exchange, there is no tax effect. However, when ETF shareholders sell shares from the exchange, there may be tax implications.
Among all the ETF's evaluations of the new discovery of mutual funds, the lower cost ratio associated with ETFs convinced me the most. Because ETFs are usually imitation indices, they are considered passive investments. Normally, if there is no change in the stock in the underlying index, the stock in the ETF will not change. Lack of active trading leads to lower costs.
Orignal From: Mutual Funds and Exchange Traded Funds (ETFs): Why I Changed Better Investment
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