Funds and ETFS

Investing in Mutual Funds and ETFs

Mutual funds and exchange traded funds (ETFs) are both designed from the same basic concept of mutual fund investment, often following a predetermined, index-oriented strategy which attempts to follow or mimic representative benchmark indexes, thus the name. However, mutual funds also have more complicated structuring as compared to ETFs with differing share classes, initial fees and additional fees payable at a distribution level. Thus, before you buy an ETF, make sure to do your research.

ETFs follow the direct route of dividends or capital gains. They are not taxable nor are they required to be registered for federal tax purposes. However, like shares in any other company, capital gains are subject to double taxation. The investor receives a capital gain on sales of an ETF’s shares for each day up to the total purchase price of the shares. For investors who do not wish to pay taxes on dividends, ETFs can result in significant tax savings.

Mutual funds and exchange traded funds generally follow very strict asset allocation policies and usually only accept funds that are part of their selected sector or area of the equity universe. This may include energy sector ETFs or real estate sector ETFs. For these investors, investing in large cap stocks like companies like Apple and Microsoft could yield substantial dividends. These large cap stock investments are typically more volatile and bear more risk than other types of mutual funds and ETFs, so this type of portfolio is not recommended for investors who are new to the investing game.