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Mutual Fund vs. ETF

  1. Hello all!

    Im in the process of putting together my portfolio and am having some difficulty deciding what would be more beneficial for a novice investor that is going to make small monthly contributions between 500-600 dollars, mutual funds, etf's, or a combination of the two.

    Since eft's trade like stocks and have a commission every time you want to purchase more shares, would it be more efficient to just own mutual funds since you can add a min. of 100 a month without incurring extra costs?

    Thanks for any replies in advance.
  2. The only real advantages of ETFs is they trade like stocks and have lower management fees.... but they have transaction costs*. Mutual funds have end-of-day fills only, no transaction fees in no load funds, but higher management fees. There are leveraged and inverse ones of both.

    Too many variable to say for sure which would be better.

    *There are some ETFs you can buy and sell without paying commissions. Some have a minimum holding period to avoid commission/charges, but others do not.
  3. $ cost averaging is easier with a Mutual fund, but at the end of each year, the mutual fund will send you a tax bill where the ETF does not.

    "Mutual funds are required to distribute their income to shareholders each year in the form of interest, dividends and capital gains. Most do so at year-end, by Dec. 31. " https://www.cnbc.com/2014/11/26/beware-of-the-year-end-mutual-fund-tax-blowup.html

    Based on only the information you have giving, for long term savings, for me, I would choose the mutual fund. I did that to save money for my daughters college. Every year I cursed the tax bill but I never would have bought an ETF or a stock in those small increments.
  4. I would go for for ETFs. commissions are so low nowadays as to be negligible. if you want to cut your commission costs in half invest double the amount to be invested and invest every two months. typical cost would be $4.95 or less, lower management fees and no taxes due.
  5. There are now a couple of hundred ETFs that trade at the various brokers' commission free as long as you hold them 60 days or more. You should be able to find something that fits what you are trying to achieve. There are lots of clones of spys, qqqq and the iwm. As was mentioned management fees are generally lower on the ETFs.
    At some future point if you want to actively trade - they price real time.
  6. If you’re averaging in and building a portfolio over the long term, super low cost no-load mutual funds at houses like Vanguard, Fidelity, etc are hard to beat.

    There are several brokers that allow you to purchase no fee ETF’s as well, but they’re often paired up with low volume ETF providers. The spread isn’t usually favorable on many of them.
  7. If you know how to properly hedge a mutual fund with regards to their holdings, you can make a killing over what a prop accounts ETF’s can offer. It’s all about what you can find.

    The spread between 1% and 8-15% margin on millions of dollars is enormous.
    I don’t trade it anymore but you can make a good living off of it.
  8. how does the spread arise? TIA.
  9. It’s a financing(arb) spread, nothing more.

    Read Sec 15c3-1.

    I’m not going to hand it to you.
    The caveat is, you will need a professional account to do this. Some deposit props can offer you this.
  10. Net capital rule?
  11. Yes.

    Also, If you find it..... you owe me $2,000.00. But, I’ll take a JW blue and a few nights in NYC.
  12. I assume to implement this arb you have to be a broker dealer since that restriction is for BDs not customers.
  13. Not exactly, a professional customer can also use it. Clearly, you’re going to have to be registered, licensed, and with a firm that has access to haircut margin, not PM.

    But, if you can’t do that..... why are you trading in the first place?

    I’ve always said retail doesn’t make money, they give it away.
  14. What pro firms are left standing? Only Bright trading right?
  15. I believe Kershner Trading in Austin, Tx.

    Chimera securities, I haven’t recently spoke with but they might help.

    First NY securities, first choice if you can qualify and get ahold of them.

    I have others but I don’t know anyone who works there so I really couldn’t help.

    I don’t trade with any of the above so I can’t really give advice on it, but it is the RBH you are after, not the leverage.
    If you don’t know the difference, you are not ready to trade.

    I trade through a prop B/D. It does not take any customers, we deal only in our interests.
  16. Well I'm out of my depth here. If you don't mind, can you explain what RBH is?
  17. Risk based haircut. For customers there is PM but not all securities are PM eligible and not all baskets are provided offsets.

    None of this has anything to do with the question asked.
  18. Got it.
  19. I’d start my own thread, but I’d rather just PM.
    Excuse my input.
  20. I'd go with ETFs. You can choose 0-cost brokerage, so you don't have to pay trading fees. If you invest with Vanguard, they can do automatic capital gains and dividend re-investments for you. Big advantages of ETFs are: 1. cost and 2. tax efficiency. Even some basic mutual funds can be very expensive (e.g., compare VGTSX to VXUS).
  21. $100 is a low amount. Even with a low-fee provider of $2, that is 2 percent of your money going to fees. That is a serious drag on performance. The lowest cost you could probably do is with Interactive Brokers. That would probably cost you $1 at a time.

    ETFs have an advantage that you can sell them in the middle of the day. So you could put a stop order underneath. That way if the ETF price is getting destroyed, you can have the stop order try to sell your shares off before too much damage is done. This is a relatively uncommon event. The idea of ETFs is to diversify so the price swings are not as dramatic from day to day, and no one stock can do too much damage.

    You seem like a good candidate to open a Vanguard mutual fund. They practically built the company for people like you. They have lots of funds, and are a leader in the industry for low cost. Nothing wrong with mutual funds at all. They form the centerpiece of many people's sensible long-term investing strategies.

    Maybe Vanguard has a zero fee if you buy their ETF funds. Then you could buy ETFs or mutual funds. They offer both. Their philosophy is diversify at low cost. But they are largely agnostic regarding whether you want to use ETFs or mutual funds to achieve that goal.