The biggest difference between ETFs and index funds is that ETFs can be traded throughout the day like stocks, whereas index funds can be bought and sold only for the price set at the end of the trading day. ... They can be traded like stocks, yet investors can still reap the benefits of diversification.
ETFs tend to be more liquid, have lower net fees, and are more tax efficient than equivalent mutual funds. For those seeking a more active approach to indexing, such as smart-beta, a mutual fund may provide more expert professional management.
There are a few differences between index funds and mutual funds, but here's the biggest distinction: Index funds invest in a specific list of securities (such as stocks of S&P 500-listed companies only), while active mutual funds invest in a changing list of securities, chosen by an investment manager.
ETFs trade throughout the day while index funds trade once at market close. ETFs are often cheaper than index funds if bought commission-free. ... Index funds can be bought in dollar increments, while ETFs must be bought by the share like stocks. ETFs are more tax-efficient than mutual funds.
Vanguard Short-Term Treasury ETF (VGSH)
Buffett recommends that 10% of his wife's portfolio go to short-term government bonds. Vanguard Funds has an ETF that does exactly that. The Vanguard Short-Term Treasury ETF invests in investment-grade U.S. government bonds with average maturities between one and three years.
But there are also disadvantages to watch out for before placing an order to purchase an ETF. When it comes to diversification and dividends, the options may be more limited. And vehicles like ETFs that live by an index can also die by an index—with no nimble manager to shield performance from a downward move.
The chief advantage of mutual funds that cannot be found in ETFs is variety. ... Mutual funds offer the same type of indexed investing options as ETFs, and they offer an impressive array of actively and passively managed options that can be fine-tuned to cater to investors' needs.
ETFs carry more flexibility; they trade like stocks and can be bought and sold throughout the day. Mutual fund shares price only once per day, at the end of the trading day, but may benefit from economies of scale. While Vanguard fees are low in many of its products, ETFs tend to be more tax-efficient.
One of the ongoing discussions about ETFs is their risk profile relative to traditional mutual funds. While different in structure, ETFs are not fundamentally riskier than mutual funds.
Seven consumer cyclical ETFs to buy now:
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