Do you prefer mutual funds or ETFs? To figure out which is better, first you’ve got to know what each does. Then you can determine how they fit into your financial strategy.
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What are mutual funds and ETFs? And how do they work in your financial plan?
Mutual funds are investment vehicles allow people to pool their money together at a relatively low cost to get some diversification. There are about $19 trillion invested into mutual funds in the United States. If you have a 401(k) or 403(b), chances are, you are already investing in mutual funds.
So what about ETFs (exchange traded funds)? Should those be a part of your financial plan? David talks us through the difference between the two and how they can be used in your plan. Understanding the strategy behind both mutual funds and ETFs and how to implement them might tap into a bigger question: are you pursuing an indexed strategy or an actively managed strategy?
Just like visiting a restaurant, sometimes a simple menu makes the decision-making easier but doesn’t necessarily make the experience better. Whereas a restaurant with too many options, some of which you don’t even understand, can leave you wishing for simplicity. While mutual funds and ETFs do different things, there are a number of options available when it comes to how they work in your plan. Ultimately, it’s about finding the right combination for you.
Listen to the entire episode to hear David explain the strengths and weaknesses of mutual funds and ETFs or click on the timestamps below to skip ahead.
[1:45] – What is a mutual fund?
[3:48] – Mutual funds provide an easy route to diversification.
[4:17] – What are ETFs?
[8:00] – Which is better, mutual funds or ETFs?
[9:09] – The difference between an indexed strategy and an actively managed strategy.
[11:21] – It’s important to customize your strategy to your situation.