Due to better liquidity, efficiency, and control, ETFs make better options for the common investor than conventional mutual funds.
Advantages including but not limited to lower fees, increased liquidity, and strategic flexibility make Exchange Traded Funds (herein after referred as ETFs) more desirable than typical mutual funds. Listed public close-ended funds, ETFs came on the scene only a few years ago, and they have quite a bit to offer to informed investors.
Fees
Mutual funds usually charge a front-end load (entry fee), fixed management charges, and sometimes a backend load (exit fee). Validation of the fees remains questionable, especially in periods of heavy losses like the past year. Another perspective is that these investor expenses represent additional risks or potential losses if the market moves sideways or negatively for the involved period.
ETFs on the other hand do not demand any added or obscure fees. The costs of entry and exit take no more than the average commission rates exactly like stock trading. The average direct access broker offers rates significantly lower than collective costs of mutual funds. Like any business model, lowering expenses while maintaining adequate performance creates increased efficiency.
Liquidity
While quick to enter, mutual funds frequently require a mandatory holding period for withdrawal requests. In periods of market turmoil, they could even freeze withdrawals like what happened with ING recently in New Zealand. Therefore, depending on market conditions this mutual fund feature imposes potentially catastrophic losses.
ETF share orders get filled through direct access brokers as quickly as any typical stock transaction. In other words, these transactions of market orders frequently take no more than several seconds.
Order Filling Prices
As mutual funds tend to move in large volumes of stocks, filled orders for client investors generally do not occur at optimal levels. This often leads to buying at periodic peaks and vice versa for selling. With ETFs, a simple limit-order would allow for precise entry or exit prices of execution. Every now and then, accuracy control could mean the difference between winning and losing positions.
Tactical Flexibility
Almost all mutual funds hold long-only positions of equity and debt securities. This means their performance relies heavily on economic, liquidity cycles, i.e. they are expected to fail in slow down periods.
ETFs, on the other hand, offer a wide variety of options. Short position based funds offer investors convenient downside bets against the economy. The metal or oil themes allows for trading of these commodities without need to enter the futures markets. Strategies such as arbitrage or statistical exploitations impossible to exploit via mutual funds have now become available.
The financial markets evolve as new investment vehicles surface and the less competitive lose demand then wither away. ETFs have arrived, superior in many aspects, and mutual funds have become obsolete, at least for the informed investors.
