Investors have an increasingly wide variety of securities to choose from for their portfolios, and part of the challenge many investors have is choosing which asset classes or securities fit with a given risk profile and time horizon.
Traditionally, mutual funds have provided a solution for passive investors looking for ways to make their money work for them, giving investors access to a diversified pool of assets – a portfolio that would otherwise not be available to such an investor without spending a significant amount of time researching, buying (with trading fees much higher than mutual funds typically have), and holding a range of securities within a given risk profile and for a specific time horizon.
Exchange Traded Funds (ETFs) have arisen in recent years as a true competitor to mutual funds in that ETFs provide access to many of the same securities held in mutual funds, with only a fraction of the fees associated with such funds. While still traditionally more generic than mutual funds, ETFs are fully diversified and are available in a sufficiently wide array, as to provide an investor with a range of options to suit nearly any preference, for nearly any asset class.
The fact that ETFs have lower fees is something long-term investors should definitely take into consideration. Compounded over a long period of time (say, 30 years), an investment of $10,000 today with the same growth rate over time (let’s say 6% per year) with mutual funds at an expense ratio of 1.5% or an ETF with an expense ratio of 0.35%, an investor would have very different amounts at the end of the 30 year period.
In fact, the initial investment of $10,000 would be worth more than $520,000 if invested in the ETF, and only $375,000 if invested in the mutual fund.
Invest wisely, my friends.