ETF vs Mutual Fund

Transcript

Mike:

Welcome to another episode of Mike on Money. I’m Michael Reese, certified financial planner and founder of Centennial Advisors, creator of the prosperity planning system and you know, a bunch of other stuff. Anyway, got a great episode today. We’re talking about the difference between mutual funds and exchange traded funds. I find that in the financial world, we are very clear on the differences and there’s a reason that most financial advisors are moving towards exchange traded funds. Yet, I also find that the average person, if you don’t live in the world that we live in, you’re not, you’re probably not super clear about the difference. So I thought what the heck is be a great opportunity to share. So before I dive in, remember as always, if you like this episode, just click that thumbs up button, give us some comments below. If you’d like subscribe, that’s always good.

Mike:

Don’t want to miss an episode. And of course you can share this with your friends, neighbors, and countrymen. Alrighty. As we dive into today’s topic I have here. Well, let’s play a little game. Let’s imagine that you’ve got, oh, I don’t know, a hundred thousand dollars that you want to invest. And I come to you as the super smart financial advisor. And I say, oh, have I got an investment for you? And you’re like, tell me more, Mike, I want to hear you say, okay, here’s how it works with this money. We’re going to put your hundred thousand into this investment, but here’s how it’s going to work. I don’t really know the price that we’re going to invest your money at. Like, I’m not quite sure what price I’m going to buy in at. And later on when we sell it, I’m not real sure what we’re going to sell it at.

Mike:

Like, I don’t know the price we’re going to buy at. I don’t know the price we’re going to sell that. I kinda know, but not really. And you’re probably already thinking, I don’t know, Mike, that sounds so good. Well, let’s keep going, but, but wait, there’s more, I can tell you some of the fees that you’re going to be paying, but they’re going to be these other fees. We’re never going to have an idea of what all the fees are in this investment. There’s all, there’s some fees we see. And then there a bunch of hidden fees. We’re never going to be sure exactly what you’re going to pay. So we don’t know what price we’re going to buy at. We don’t know what price we’re going to sell at. And we don’t know what you’re going to pay for fees on the money.

Mike:

That’s invested. How you like this so far. I mean, I know what you’re thinking. You’re thinking, wait a minute, Mike, I thought you were this super smart financial advisor. What’s this something’s not matching up. I said, oh no, no, but wait, there’s more there’s more we’re not real sure exactly how the money is going to be invested. Like we kind of know, but we’re not real sure. We don’t really know. We’re just kind of guessing. I know, I know you’re sitting there like, oh wait a minute here, Mike, let me get this straight. You don’t know what price I’m going to buy in at. You don’t know what price I’m going to sell at down the road. I don’t even know what the fees are going to be, that I’m going to pay. And I don’t know what I’m invested in. Seriously. You want me to put money in this?

Mike:

And I’m sitting here going, oh no, but there’s even more, right? There’s even more, you know, if you’re, if this a hundred thousand that we’re investing, if it’s not in an IRA or some kind of tax shelter, if it’s just like a regular investment account, we’re going to have some kind of goofy tax rules that we have to deal with. Like some years you’ll make money. You’ll hardly pay any tax and some years you’ll lose money and you have to pay a bunch of tax. Like you have pay gain sometimes and years where you lose money. And, and then, you know, it’s not like, you know, I buy it and I don’t pay tax. If I sell it like every year, there’s something weird going on.

Mike:

Like, oh my God, Mike, come on here, man. We got, let’s see, I don’t know the price I’m going to buy herself. It’s not, I don’t know what I’m going to pay in fees. I don’t really know what I own. And I got weird tax rules. If it’s not in an IRA, I’m like, yeah, right. Put some money in, gotta be looking at me. Like, what are you crazy? What is wrong with you? I would never put money in something like that. Well, most people wouldn’t when it’s described that way, but what did I just describe? I just described your average, your average mutual fund. That is exactly how mutual funds work. I mean, think about it. When you decide to invest in a mutual fund, you don’t know a price. You’re going to invest that you get the price at the end of the day, whatever it’s worth at the end of the day, that’s the price you get.

Mike:

So you kind of know, but you’re never sure same is true. When you sell. If you want to sell out, you get the price. At the end of the day, you could decide at 10:00 AM in the morning. I want out, you put your order in to sell that fund. Guess what? It doesn’t get sold to the end of the day until we figure out what the price is going to be. So that’s problem next. You know, they’re not transparent. The fees let’s talk about the fees. There’s no transparency for fees or investments. Yeah. They give you a prospectus to say these are kind of the fees that we know we’re going to charge you. But there are a number of fees that they don’t know what are going to be like trading expenses and you know, and other fees that happen internally. And you never know what those are going to be.

Mike:

So every time you get a prospectus, you see part of the fees, never all of the fees. And, and we’re never going to know what they are. Same with investments. You get like a bi-annual report twice a year. They give you a report and they say, Hey, here’s everything that we old by the time you get that report, half that stuff’s already gone. You never know exactly what you hold. Hey, do I own Microsoft or not? Who knows? And then of course taxes are just playing goofy mutual funds. So even though we have those disadvantages with mutual funds, mutual funds have driven an explosion of wealth in this country. Well, you know how it works in the computer world, right? You always have like, you know, version the first version 1.0, and then you have the second version 2.0 and so on. Well today in the investment world, we have these things now called exchange traded funds.

Mike:

And quite frankly, there are a lot like mutual funds, 2.0 now what do I mean by that? What exchange traded funds essentially do is to take all the good stuff with mutual funds. You know, Hey, with a mutual fund, I can be diversified without a lot of money I can deposit regularly. And I don’t have to have a ton of money to deposit in and so on. So it takes all the benefits of mutual funds, but it also essentially eliminates the bad stuff. So with an exchange traded fund, let’s start with the first one, you know, exactly the price you buy and sell at exchange traded funds are sold throughout the day. So you can buy in at a certain price. You can get out at a certain price, you know, the price of your investing, you know, the price you sell at, which is what we would call normal, next fees, full transparency with these ETFs, you know exactly what you pay.

Mike:

And normally the price is pretty darn small, third transparency. You know exactly what you own in an ETF or an exchange traded fund ETF is what they call them at all times your mutual fund. I don’t know for sure what I own only think. I kind of know what I own, but in ETF you definitely know what you own. And then for taxes, ETFs, generally speaking, not always, generally speaking are very tax efficient. They work exactly the way you would expect. It’s like, oh, I buy in. And if I’ve got dividends or interest each year, I just kind of pay in that dividends and interest. But capital gains, when you pay those, you pay those later on. When you choose to sell, if it’s in an IRA or Roth IRA or something, obviously those tax rules apply, but they’re much cleaner from a tax perspective.

Mike:

So when you hear the phrase exchange traded fund often referred to as E T F, what are they? They’re basically mutual funds, 2.0 and all of your top financial advisors and your top investment people, you don’t really see them managing a lot of mutual funds anymore. They’re all moving to ETFs. Why? Because you get all the good stuff of a mutual fund, but none of the bad, or like almost none of the bad. How about that? So mutual funds kind of old school, like horse and stuff, ETFs, brand new Corvette about that. Alrighty, that’s difference between mutual funds and ETFs. If you found this helpful, you know, make sure you hit the like button, subscribe, share this with your friends. And I hope to catch you on our next episode, see you soon.

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