For the knowledgeable, active investor who wants to participate in big picture trends, the Exchange Traded Fund or ETF Trading has many advantages over the traditional Mutual Fund. ETFs are far more transparent, efficient and economical.
Using ETF’s is an excellent choice when utilizing a trend trading method.
Be A Control Freak.
You know it’s true: the only person who really cares about the health of your portfolio is you. Using Mutual Funds to increase your net worth is like depending on the school cafeteria to improve your kids’ diet. They act in their own self interests which are influenced by a lot of political elements you’ll never be privy to.
Sector specific Mutual Funds are usually managed by younger, inexperienced staff. They’re looking to prove their worth to the fund family and your well-being may or may not serve that goal. Larger funds are managed by experienced managers who have alliances and interests unknown to their companies. In addition, your buy and sell orders can only be filled at the daily open price. Intraday fluctuations do not show up in the fund’s price.
A sector specific ETF is purely affected by the stocks included in its holdings. You don’t have to worry about the manager’s extraneous motivations for trading or diversions. Barring any unusual events like a bankruptcy, merger or de-listing, your ETF basket remains the same. You may even chose during the day to buy or sell an exchange traded fund – they trade anytime the market is open. Want in or out during breaking news effecting the markets? No problem with an ETF.
Knowledge is Power.
As an active trading investor, you follow the markets and keep abreast of the political and economic trends. . Why would you want to turn over the power to act on that information to a third party Mutual Fund manager?
Fund managers, in order to protect their turf, restrict the information they share with fund share holders to the legal requirements. During the lag time between reporting periods, they may move in and out of positions, even change the fund’s primary focus, without your knowledge. Additionally, “window dressing” to create the illusion of a fund holding this quarter’s winning stocks, is a time honored tradition that results in selling low and buying high, never a good way to make money.
Transparency is built into ETFs. They establish their holdings and are committed to retaining them. You know at all times what you own and you can clearly see the results of your decisions to buy or sell the fund. There is no need to fix-up a quarterly statement for reporting.
Taxing Issues.
Mutual Funds buy and sell positions unrelated to the tax implications for individual share holders. They may sell to meet redemptions and buy to put new deposits to work. This often results in short-term gains that increase your tax burden. The famous end of year capital gains distribution may also cause you to be “credited” with fathom gains you will pay taxes on. An unexpected capital gain distribution is fair less likely from an exchange traded fund.
The timing of your ETF trades is strictly up to you. If waiting a few days or weeks to sell will shift your earnings into a lower tax bracket, you can choose to take the risk and wait. You put new or recycled money to work when it’s best for you, not because you have limit on the amount of cash you can hold. And you don’t have to wait to find out what your taxable earnings are; you can see what your portfolio has generated at any time of the year. It just makes tax planning that much easier.
Lower Fees and More Options.
No options exist for traditional Mutual Funds. The opportunity to control assets without owning them only exists for individual securities and the ETFs that own baskets of stocks. And, just because that Mutual Fund bills itself as “no-load” don’t think you’re not paying the management’s salary and bonuses. 12b-1 fees are the ones you see. Transaction and management expenses are deducted from earnings before they ever get to your account, further reducing your gains.
ETFs have extremely low fees because no manager needs to be making adjustments to the fund’s holdings – and no wondering what went out the back end. For active traders who want to look at the big picture instead of betting on individual company’s ability to produce returns, the ETF is far superior to the old fashioned Mutual Fund in just about every way.
For those who still think they can set it and forget it, letting a professional fund manager decide what to put their money into, they’re going to pay for that privileged with their hard-earned money; working years longer than the investor taking control of their own accounts with EFTs and a proven trading system.
