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Comparing ETFs and Index Mutual Funds


Exchange-traded funds and index mutual funds are very similar investments in some ways. Both can provide a source of diversification for your portfolio and a means to follow a particular sector or index. However, this is where the similarities end. As noted below, there are several differences that can make one of these investments a better choice for your portfolio. Please take some time to let these differences soak in. After all, these variations may make the distinction between reaching your investment goals and falling short of the mark.

Before investing in any mutual fund or exchange-traded fund, carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. Free prospectuses may be ordered from the fund company or send a request to [email protected]. Many but not all prospectuses are available online. Not all mutual funds are available through TradeKing. Read the prospectus carefully before investing. Investment returns will fluctuate and are subject to market volatility so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the fund company. Some specialized exchange-traded funds can be subject to additional market risks.



Feature

ETFs

Index Mutual Funds

Intra-day trading

Yes

No, orders placed during the day are executed at the close of trading

Diversification across a number of securities

Yes

Yes

Tracks index or sector

Yes

Yes

Buy on margin

Yes

No

Sell short

Yes

No

Expenses

Brokerage fees are incurred with each transaction, and there is a spread between bid and ask prices

May have any or all of the following:

  • management fees
  • 12b-1 fees
  • redemption fees
  • sales loads

Tax considerations

ETFs typically make fewer capital gains distributions

Must distribute any capital gains and dividends annually to investors, which may create a taxable event

Redemptions

Must be sold through a broker

Shares may be redeemed directly with fund company






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