We all customize our investment strategies based on our understanding of the financial landscape and individual risk appetite.
The wide variety of products available in the marketplace can be a benefit to investors as it allows each market participant to build a portfolio best suited for their unique situation. The downside in this environment can the complexity and volume of available products, which is a reason that investors need to continually educate themselves in an evolving financial world.
Mutual funds and ETFs are common products found in many investors portfolios. For investors who don't have time to manage their money, these can be effective investment solutions.
However, investors using these products must also be aware there's a cost involved when outsourcing one's money to an outside manager. A recent episode of You've Gotta Be Kidding Me highlights some of the costs associated with mutual funds and ETFs so investors can better understand the structure of these products.
A mutual fund is an investment vehicle that pools the money of many individual investors. This capital is then invested by money managers with the intent of producing an attractive return.
While this concept may not sound particularly complex, practical investment in mutual funds becomes slightly more confusing when one considers there can be up to 7 different mutual shares classes, all with different fee structures.
On the aforementioned episode of You've Gotta Be Kidding Me, hosts Tom Sosnoff and Tony Battista highlight some of the common fees associated with mutual funds - as shown below:
As you can see from the above slide, the fees associated with mutual funds can be substantial. Consequently, any potential investment in a mutual fund requires a comprehensive understanding of the fees associated with each share class and an analysis of which one best fits your investment goals and risk profile.
As Tom and Tony highlight later in the show, investors also have to be aware of how investment managers report these costs/fees both upfront and ongoing.
Exchanges Traded Funds (ETFs) are another popular investment choice of individual investors. While ETFs do share some things in common with mutual funds, there are also differences to be aware of. While both pool money and invest in stocks, bonds, and other assets, ETFs typically are built to track an index, while mutual funds usually have managers that more actively manage the portfolio.
ETFs also trade on exchanges and can be bought or sold during the trading day, while mutual funds are priced by their Net Asset Value (NAV) and trade after the close.
While ETFs are generally believed to be lower cost products than mutual funds, Tom and Tony point out on You’ve Gotta Be Kidding Me that ETFs also utilize management fees which need to be considered in any investment evaluation. ETFs do not have minimum holding periods, which do exist in some mutual funds (which means a penalty can be assessed).
Tom and Tony close the show by providing an example on how much an investor could pay in fees to a mutual fund over the course of 17 years. When assuming an initial investment of $100,000 in a front-fee fund costing 6% a year with an additional 1% management fee, tastytrade estimates the total cost over 17 years would be around $51,500 in fees and missed opportunity - an amount that represents over 50% of the original amount invested.
We encourage you to watch the entire episode of You’ve Gotta Be Kidding Me focusing the cost of mutual funds and ETFs when your schedule allows.
If you have any questions on the costs associated with these products or any other investment-related topic we hope you’ll follow up at firstname.lastname@example.org.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.