Since the financial crisis, many investors lost faith in mutual funds, especially actively managed ones with higher fees, and flocked to low-cost exchange-traded index funds. This isn’t a bad thing, but there is no reason to categorically exclude mutual funds from your portfolio.
While I am a fan of ETFs and use them extensively in clients’ portfolios, I see no reason to choose between them and mutual funds. Why not use both? Most investors have use for both in their portfolios, but their specific allocation should vary.
Advantages of ETFs
The appeal of ETFs: They are usually passively managed, meaning they have lower costs because they simply mirror an index. As they reflect a diverse basket of stocks or other securities, ETFs are generally less risky than individual stocks.
Mutual funds also offer diversified portfolios, but many have investment minimums and sales loads, which are like entrance or exit fees. Index mutual funds, like Vanguard 500 VFINX, are a minority in the mutual fund universe. ETFs are overwhelmingly concentrated in indexes. Unlike mutual funds, ETFs trade throughout the business day, just like stocks.
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