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ETFs vs. Mutual Funds: A Different Cone for the Same Ice Cream

Are you uncertain about what an ETF (Exchange Traded Fund) is? Do you wonder why or how it might fit into your overall investment portfolio?

Think of the stocks, bonds or commodities as a flavor of ice cream–let’s say Jamocha Almond Fudge (a personal favorite). Your server asks you how you’d like to receive your Jamocha Almond Fudge, in a cup or cone?  In a cup or cone with sprinkles and chocolate, or just chocolate?

So, how do you know which “type of cone” you prefer? Mutual Fund or ETF?

These two “investment holders” are similar, yet it’s important to know the striking differences…The Striking Differences – ETF vs. Mutual Fund:

Transparency

On a daily basis, the ETF sponsor is required to report the underlying holdings of an ETF. In contrast, a mutual fund is required to report its holdings much less frequently. For instance, a mutual fund is required to report on a quarterly basis. From a diversification standpoint, ETFs give you greater transparency as to what you own on a daily basis.

Tax Efficiency

With most ETFs, if you own it and decide to sell it, your gain or loss will be based on your original cost basis (similar to a stock). With a mutual fund the same is true.  However, additionally, you as the investor in a mutual fund, may have taxes to pay regardless of whether or not you sell the fund. For example, if the manager of the mutual fund sells assets within the mutual fund during the year, you as the investor of the fund are also the recipient of any capital gains distributed by the mutual fund. If you’ve been a mutual fund investor within a taxable account for a while, you may have felt the negative impact of those gains on your tax returns. Sometimes, even though the mutual fund itself may be down in value in your portfolio, you still may have taxes to pay.

Control

An ETF trades like a stock, meaning it will have a bid and offer throughout the trading day. A mutual fund, in contrast, prices at its net asset value (NAV) on a daily basis. This means that buyers and seller will get the price of the fund as of its value at the end of the trading day, not intra-day as with an ETF.

As experienced advisors, we have believe it important to look at the size, style, sector, risk, etc. (theflavor,” if you will) of an investment.  And, importantly also the “cone” in helping clients decide on the most appropriate investment choices for them.

Sources/Links:

Lenity Financial, Inc. – in the news

How to use ETFs to Hedge Against Rising Rates – Mark Bova,Financial Planning Magazine

Important Note: The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance. Actual results or developments may differ materially from those projected.

Nothing in this post should be construed as an offer to sell, nor the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.

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