NetPicks is an online trading company that was established with the underlying goal of creating a user-friendly and genuine platform where online traders could carry out their activities safely and knowledgeably.
The company has been in existence since 1996 and has facilitated numerous online trades which includes: Forex, systems to signals, Futures, and Stocks. In this manner, NetPicks has resulted in the financial success of many regular traders.
Netpicks provides various financial products that one can utilize for investing in the bond market and stock market. Exchange traded funds (ETFs) and mutual funds are the commonly available products.
In a bid to iron out the differences, we will have to answer the following questions.
-What difference is there between a mutual fund and exchange traded fund?
Exchange Traded Funds vs. Mutual Funds
An ETF is a marketable security that controls the motion of various asset classes, and these include bonds, stocks, commodities, foreign currencies, and baskets of assets like an index fund. It is profitable to invest in an ETF because one is entitled to similar shares received by the stock owner. The ETF trades in a similar manner to the common stock on a stock exchange. The price of an ETF varies daily based on the buying and selling rates.
Brief History of ETFs and Mutual Funds
The ETF was first introduced in the US market in January 1993 and was designed to monitor the performance of the S&P 500 stock index. The recognized formal name of the ETF was S&P 500 SPDR. This same ETF is still in existence today and dominates the investment community. Nowadays, the product is commonly known as “spiders.” As of May 2017, investors globally held over $4 trillion worth of in ETF products. There are nearly 7,000 different types of ETFs available for individual and institutional investors.
On the other hand, a mutual fund is an investment container that works under that principle of collecting together funds from individual investors to invest them in securities like bonds, stocks, money markets and other similar kinds of assets. Mutual fund was first introduced in 1924 but did not break into the large scale investment sector until the 1950s. The mutual fund industry witnessed a tremendous increase in involvement in conjunction with the roaring bull market of the 1980s at the start of 1982. As of May 2017, investors globally held about $36 trillion worth of mutual fund products.
A money manager professionally manages every mutual fund. The money manager is a professional who manages each mutual fund and is responsible for investing the mutual fund’s capital in a bid to create income and capital gains for the fund’s investors. Unlike a common stock, an investor in a mutual fund is entitled to receive shares, similar to shares acquired by the owner of the stock. A vast majority of mutual fund shares do not apply within trade on a stock exchange platform.
Shares are bought and redeemed at the fund’s net asset value (NAV) per share. NAV is the value of the securities in the portfolio divided by the number of outstanding shares. ETFs are particularly common to individual investors because of the affordable structure. The average equity ETF charges an annual fee of 0.40%. However, a majority of ETF dollars are invested in index funds. These specific ETFs carries an average annual fee of only 0.23%.
The top three leading firms in the equity index ETF platform are Vanguard, State Street & BlackRock. These three companies operate with nearly 70% of all available ETF assets. Because of their large sizes within the ETF industry, the firms are able (through advantages of large economies of scale) to charge a lower amount of fees as compared to the companies. Another common type of ETF that is available to investors is the Fixed income ETFs. In the past few years, the mean annual fee for a fixed income ETF has significantly dropped from 0.26% to 0.20%.
Decline of Mutual Fund Fees
Mutual fund fees have also dropped in the past couple of years but have failed in matching the cost reductions in the ETF community. The mutual fund community is second to the ETF community. In the past decades, the ETF fees have kept on reducing and this is the likely trend for years to come. The mean annual fee for any stock index mutual fund is 0.63%. Two decades ago, 1.04% was the stock index mutual fund fees. The industry has significantly cut down its fees within the past twenty years, but the mutual fund industry remains second to the ETF industry. The results are almost similar to the fixed income arena.
Why Are ETF Fees Lower?
Mutual funds are under the management of strict professional money managers, and there is a delicate price tag attached to the administration of each fund. The key marketing strategy within the mutual fund industry is that mutual funds offer individual investors with an account professionally managed.
This is true but based on the previous record of performance results the increased expense of a managed account does not compensate the investor adequately regarding heightened rate of return. Hence professionally managed accounts do not measure up to the added expense. The low performance that did not measure up to a lot of fees is a major reason as to why Mark Soberman, the president and founder of NetPicks laid off his money manager and finally realized growth in his retirement account.
After receiving a buy or sell order from a customer, a mutual fund company processes the order internally. This needs a fair amount of documentation, record keeping, and compliance issues. After the customer’s order has been processed, the mutual fund’s professional manager ought to invest the funds in the marketplace. This includes buying or selling securities and catering for all the necessary commissions & spreads.
This process involves money, and all fees and expenses are taken through and approved by the mutual fund investor. A typical ETF transaction is less complicated because ETF trades occur with other investors and not with the mutual fund company itself. Therefore, ETF customers are charged lower fees. These are just but a few of the reasons as for why the mean annual fee for an ETF is relatively lower than the mutual fund. Note that ETF investments are more tax efficient unlike investments in mutual funds.
Which between the two financial product is most advantageous?Based on the outlined reasons above, It’s more advantageous to invest in an ETF as compared to investing in a mutual fund. The lower fee structure of the ETF certainly outweighs the benefits of having a mutual fund professionally managed account.
Hypothetical comparison of two accounts indicates that with an investment of $10k either in ETF or mutual fund, the annual rate of return is assumed to be 7% for both cases. However, there’s mean annual fee of 0.23% for ETF which is lower than 0.56% for mutual funds. With the ETF, after ten years the value will be $19335.41. The ETF investment quickly outweighed the mutual fund investment because of the lower fees.
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