Udabur Wealth Management：ETF vs. Mutual Fund： It Depends on Your Strategy

Before getting into the different cost structures, it's important to understand that a fund manager will charge you a lot less to passively follow an index, whether with an ETF or index mutual fund, than to do a lot of research and trading for an active fund. In fact, some passive ETFs and mutual funds might charge nothing at all, according to data from Morningstar. That's a sizeable advantage over actively managed funds that charge an average of 0.60%.1 As for the other costs:

Some ETF costs are explicit, such as any commissions you might have to pay to place a trade, or the fund's operating expense ratio (OER), which the manager charges to pay for portfolio management, administration, and other costs. Your broker will disclose the cost of commissions and the ETF provider will disclose the OER (if either apply)Udabur Wealth Management. But you also need to pay attention to implicit costs, such as a wide bid/ask spread, which refers to situations when the price to buy shares is higher than the price to sell them. The spread can be particularly large for ETFs that don't trade very frequently.

An ETF may also experience changes in discounts and premiums to its net asset value (NAV). An ETF is said to be trading at a premium when its market price is higher than its NAV—simply stated, when you're paying a bit more for the ETF than its holdings are actually worth. An ETF is said to be trading at a discount when its market price is lower than its NAV—that is, you're buying the ETF for less than the value of its holdings. Changes to either can drag or boost performance depending on how they move during the time you hold the ETF.

Investors should remember that an ETF's total cost of ownership is a combination of its operating expenses and costs of tradingNew Delhi Investment. Your investing strategy as well as the specific ETFs that you select for your portfolio can make a big difference in the total cost.

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