This is a sponsored column by 3Summit Investment Management, LLC based in Vienna, VA. 3Summit designs custom, modern investment portfolios and has unique expertise in managing investment risk.
By Dan Irvine | Principal, 3Summit Investment Management
Most likely you have heard of ETF’s, also known as Exchange Traded Funds.
I am frequently asked what ETF’s are and how they differ from better-known mutual funds. In short, ETF’s are vastly different securities than mutual funds, and have many advantages over mutual funds.
ETF’s, like mutual funds are pooled investment vehicles, meaning investors can buy shares of a fund with each share representing an undivided interest in the underlying portfolio of assets that the fund holds.
Also, like mutual funds, the majority of ETF’s are regulated under the Investment Company Act of 1940, which provides important protections to investors including oversight by an independent board of directors, a requirement that fund assets be held separately from advisor assets and comprehensive oversight by government regulatory bodies namely the SEC.
This is where the similarities between ETF’s and mutual funds end. ETF’s have many advantages over mutual funds including greater tax efficiency, superior trading liquidity, better transparency and finally ETF’s almost always charge lower fees than mutual funds. While there are exceptions, a major distinction between a mutual fund and an ETF is the approach that the respective fund structures use in investing the fund’s assets.
Mutual funds take an active investment approach by seeking to earn greater returns than a specified index by picking individual securities that analysts and portfolio managers believe will outperform the index. ETF’s take a passive investment approach by investing in the underlying securities of a specific index with the goal of achieving similar returns to the index.
Let’s quickly examine the most important advantages ETF’s provide investors compared to mutual funds.
Greater Tax Efficiency
ETF’s are almost always preferable to mutual funds for taxable investment accounts because they generate less tax liabilities in the form of capital gains distributions compared to a similarly structured mutual fund. ETF’s generate fewer taxable events because of how they are structured to handle shareholder redemptions.
Paying capital gains tax on an unprofitable position is not simply unappealing it is a very inefficient way to grow wealth, yet a common scenario with mutual funds.
The primary reason ETF’s are more liquid than mutual funds is that they trade on an exchange intra-day. This means ETF shareholders may buy or sell their shares at the net asset value of the fund anytime throughout the trading day. Mutual fund shares can only be traded after markets close and the trades are executed directly with the fund provider instead of over an exchange.
ETF’s are generally more transparent than mutual funds because in most cases ETF’s provide transparency into underlying holdings daily versus a mutual fund that generally reports holdings quarterly. The daily transparency ETF’s provide makes it easier to evaluate and monitor the management of individual ETF’s. Additionally, ETF’s generally provide full transparency into the security selection and trading process and the security selection is systematic, meaning manager discretion does not really play a role in how an ETF is managed.
The most important fee difference between ETF’s and mutual funds is that ETF’s do not carry sales loads. Most actively managed mutual funds charge a sales load when shares are purchased, charging anything from 1% to more than 5% for simply having the pleasure of buying the mutual fund. Furthermore, mutual funds carry a management fee that is charged as a percentage of assets invested per year, according to Morningstar as of 2018 mutual fund management fees averaged .67% for actively managed mutual funds compared to .15% for ETF’s.
Replacing any mutual funds you hold with ETF’s is one of the easiest ways to improve your investment portfolio and dramatically reduce investment expenses.
To learn more about why ETF’s are one of the most important financial innovations in decades and how 3Summit uses them in the management of investment portfolios, read our article here or listen to our podcast episode on the subject.
If you would like professional assistance in evaluating your investment portfolio and strategy, we happily provide free consultations and analysis. Also, consider gaining more unique investing insights by listening to our popular podcast or viewing our investing video series.
3Summit Investment Management is a fiduciary, fee only investment advisor providing clients with an alternative to outdated, conventional investment portfolios. We design custom, modern portfolios capable of delivering greater wealth accumulation with much lower levels of risk. To learn more about how we can help you improve your long-term investing results call (571) 565-2161, email ([email protected]) or visit 3Summit.com.
Construction on The Rylan apartments in the Highland District (staff photo by Jay Westcott) Fairfax County is moving forward with an update to its affordable housing policy that could ensure…
Journalist Bob Woodward at the Washington West Film Festival’s 40th anniversary screening for “All the President’s Men” (courtesy of Washington West Film Festival) The movie world’s annual parade of fall…
Thinking about taking the next step in your career? The Arlington-based Schar School of Policy and Government at George Mason University offers flexible part-time or full-time options for graduate certificate…
Fairfax County has launched a new data dashboard on opioid overdoses (via Fairfax County Health Department) With opioids topping the list of causes of non-natural death in Fairfax County, local…
Chris Green is one of the DMV’s finest fitness instructors. A Lululemon and South Block ambassador, he is a coach and mentor to so many. He embodies grace, positivity and motivation in ways that no one else can. If we could all learn a thing or two from him, the world would be a much better place. He does so much for others, and does so with a smile on his face 99% of the time.
He recently ruptured his Achilles and has an incredibly long and tough journey ahead. As if COVID hadn’t impacted fitness professionals enough, throw this in the mix and it’s a double, even triple whammy. CG is no longer able to work and do what he loves for the time being because of this and we’d love your support.
The Rhea Baker State Farm Agency is proud to support Shelter House in providing safe places to be during quarantine. Shelter House’s mission is to prevent and end homelessness and domestic violence. Right now they are providing over 200 hotel rooms to those in need in our community. In the past year, across all programs, Shelter House served nearly 500 households comprised of over 1,500 individuals, 60% of which were children.
Of the households that exited shelter, over 70% moved to permanent housing. The Baker Agency has served Vienna and Tysons residents and business owners since 2007 and proudly offers insurance solutions for you home, condo, auto insurance, life insurance and more. We offer complimentary reviews and coach teen drivers to safer, better drivers, and to help keep your auto insurance rates down! We are always happy to talk or text at 703-847-6880.