From
Your Perspective:
Comparing mutual funds, ETFs & UITs
Choosing among index investments
Index investment products may be a good way to help you
allocate
and
diversify
your
portfolio.
The variety of products — from broad-based
index funds
to quant funds to a vast array of ETFs
focusing on different aspects of the market — means that you have lots of choices, whether you are just starting to invest or want to fill in some gaps in an extensive portfolio.
But you do have to comparison shop. First, there are some basic distinctions between mutual funds, ETFs, and other index investment products that you should factor into your decision-making. You may decide to stick with one type or another, or it may turn out that you purchase a variety of different types. Then there is the choice of one or more specific funds, ETFs, or UITs to suit your needs. Here are a few of the things you’ll want to consider.
Weighing the differences
While you can trade ETFs throughout the day,
sell them short,
or buy on
margin
— which you can’t do with mutual funds — you must buy and sell ETFs through a brokerage account as you would individual securities. This means commissions may add substantially to your investment costs. If you plan to trade often or use a
dollar cost averaging
strategy, investing fixed amounts of money on a regular schedule, brokerage commissions could have a major impact on your investment
return.
On the other hand, if you plan to make large individual purchases infrequently, the cost and tax efficiencies of ETFs may to work to your advantage.
While mutual funds may not offer the trading flexibility that ETFs do or track as many exotic indexes, you may find their costs are comparable to those of ETFs that track established indexes. Remember, too, that you can redeem mutual fund shares at any time at their current
NAV,
often without transaction costs.
It’s a good idea to talk to your financial professional to help you create a plan for including index investments in your portfolio and choosing the right mix of individual products to help you meet your goals.
Mutual funds
Exchange traded funds
Real-time quotes
No
Yes
Intraday trading
No
Yes
Commissions or sales charges
Sometimes
Yes
Shareholder services
Yes
No
End-of-day NAV=
Trading price
Yes
No
Commissions or sales charges to reinvest earnings
Sometimes
Yes
Buy on margin or sell short
No
Yes
If you’re looking for an investment that combines portfolio diversification and transparency with the ability to generate regular income, you may want to consider bond unit investment trusts (UITs). If you have limited amounts of money to invest, bond UITs can let you achieve greater diversification than you could with individual securities. Also, because these UITs mature on a specific date, from one year to several decades, you can time when your
principal
will become available to meet anticipated future expenses, such as tuition payments.
