The reason I like exchange traded funds vs. mutual funds is the first reason on the list.

The other reason I ETFs is because some Exchange Traded Funds have options, and I like options – getting paid is fun!

I’ve mentioned how I generate additional income, which you can do with ETF and not mutual funds, in How To Make Money Renting – Stocks and How To Make Money Going Naked.

I was looking at reasons for having Exchange Traded Funds, so I thought I would put the list on my website.

Why ETF’s?

1. Instant Diversification -The purchase of a single ETF gives investors exposure to a basket of stocks creating diversification and eliminating company-specific risk (similar to mutual funds).
2. Tax EfficiencyDue to low turnover, most ETF’s do not have large capital gains that need to be paid out to investors which result in phantom income. Mutual funds on the other hand are known for paying out year-end capital gains even if the mutual fund has lost value.
3. Intraday Pricing – An ETF can be bought and sold throughout the regular trading session in the same manner as a stock. A mutual fund can only be bought or sold at the Net Asset Value, which is computed at the end of the trading session.
4. Low Expense Ratios – The annual expense ratio of ETF’s is lower than that of mutual funds. For example the Vanguard Emerging Markets ETF (VWO) has a low annual expense ratio of 0.3%. The category average for an emerging markets mutual fund is 1.83%. Over time this will eat into your profits.
5. Low Fees – The cost of buying and selling an ETF is the same as an individual stock. Some mutual funds charge loads that can be as high as 5% of the initial investment.
6. Passive Investment Vehicles – ETF’s are passive investments that track a set index and the composition is only changed a couple times per year. Most mutual funds are actively managed and therefore trades are taking place daily. The chance of your mutual fund outperforming the market by trading is approximately 20%.
7. Ability to short and buy on margin – Traders that would like to bet against a specific ETF moving higher can short sell the ETF. Investors also have the ability to leverage their account with margin when buying ETF’s.
8. Convenience – ETF’s can be purchased the same way as a stock through an online brokerage firm. When it is time to sell it can also be done online with the mere cost of making a stock transaction.
9. Exposure to niche sectors – A new advantage of ETF’s is exposure to niche areas in the market that mutual funds do not offer. For example, there is a water infrastructure ETF, an ETF that concentrates solely on Singapore, or an ETF that moves with the price of natural gas futures.
10. Transparency – Nearly all ETF’s track an index that is reallocated wither every quarter or twice per year. Therefore, on any given day you can determine what stocks make up your ETF’s.

To summarize, an ETF acts much like a mutual fund, only with more advantages. Easy to buy and sell – especially during the day, when I want it purchased and sold, and I don’t have to wait while games are being played with my money. I know what companies, for example, make up the fund daily. Options – I can write covered calls or naked puts and generate extra income.

(If you want to read more about them, check out the company Penn Financial Group. I don’t get paid, receive compensation or anything from PFG. I just saw their list and thought it was worth sharing.)

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