2-Minute Money Manager: Should I Invest With ETFs?

Putting money in jar
Photo by Atstock Productions / Shutterstock.com

Welcome to your “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about investing in exchange-traded funds, also known as ETFs. They have become one of the most popular ways to invest in stocks, bonds and other securities, attracting many billions of investor dollars. And there’s a good reason why: They allow small investors to put money in the markets easily and inexpensively.

Want to know more about ETFs? Watch the following one-minute video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript to find out what I said.

You also can learn how to send in a question of your own below.

For more information on this topic, check out “How to Get Started Investing With $500 or Less” and “12 Money Facts That Everyone Should Know in 2019.” You can also go to the search at the top of this page, put in the word “invest” and find plenty of information on just about everything relating to this topic.

Also, remember that if you need anything, from a better credit card to help with debt, you’ll find it in our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, everyone, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson. You ask a money question, I answer it quickly.

Today’s question comes from Gary:

“Is it wise to purchase exchange traded funds (ETFs)?”

Before we answer Gary’s question, let’s explore the differences between two similar investment vehicles: mutual funds and exchange-traded funds.

Understanding mutual funds

You’ve probably heard of mutual funds. A mutual fund is a way to pool your resources with other investors and own a small slice of a bunch of stocks (or bonds, or both), instead of a bigger chunk of just a few. It’s one of the fundamentals of finance: safety through diversification.

A mutual fund also allows you to hire a company to help with the paperwork, as well as professionals who are theoretically smarter than you when it comes to knowing what to buy and when to sell it. Since these management fees are spread among thousands of investors, they’re more affordable.

Fund management can also be active or passive. Active managers study companies, then pick the stocks or bonds they think will perform best. A passive manager just picks stocks to mirror an index, like the S&P 500. As you might imagine, picking the stocks in an index is easier than figuring out what to buy and sell. That’s why actively managed funds typically charge a larger management fee than passively managed index funds.

According to research firm Morningstar, the average annual management fee for actively managed funds in 2018 was 0.67% of assets. Passive funds’ fees averaged 0.15%.

Mutual funds may also have a built-in commission, known as a load, when you buy or sell. If they feature a commission, they’re called load funds. If they don’t, they’re called no-load.

To summarize: A mutual fund allows you to spread your eggs among many baskets and hire professionals to watch them. Mutual funds make a lot of sense, which is why they’ve been around a long time: since 1924.

Drawbacks of mutual funds

A mutual fund is valued only once per day. After the market closes, the fund manager adds up the closing values of all the securities in the fund, divides it by the number of shares outstanding, and there you have it: your price per share. If you buy today, that’s what you pay. If you sell today, that’s what you get.

It’s a simple system — it had to be in the days before computers — but there’s a potential fly in the ointment. Namely, what if you want to buy or sell in the middle of the day? What if the market is falling and you want to get out before it falls more? Or it’s rising and you want to get in before it goes up more?

When you trade individual stocks, you can buy or sell any time the market’s open and if you choose, you can name the price you’re willing to pay or accept. But with a mutual fund, you place your order while the market is open, but you don’t know the price you’ll get until after the market is closed.

ETFs to the rescue

In 1924, there was no way to maintain split-second values throughout the trading day for the hundreds of stocks in a mutual fund. But by 1993, computers made these calculations simple, and the exchange-traded fund was born.

As the name implies, exchange-traded funds, or ETFs, are simply funds that trade on a stock exchange. Like a mutual fund, they’re a diversified portfolio with professional management. Like a stock, you can buy as little as one share in a few seconds any time the market is open. You can also choose the price you’re willing to accept.

So, an ETF is simply a mutual fund/stock hybrid.

ETFs also tend to have lower expenses than traditional mutual funds. According to Morningstar, the average expense ratio for passively managed ETFs in 2018 was 0.57%. Actively managed ones, 0.76%. Both of those costs are significantly lower than those of the ETF’s mutual fund cousins.

ETFs do have at least one drawback relative to mutual funds, however: As with a stock, you’ll typically pay a commission to buy or sell shares. I say “typically” because there are now a lot of ETFs that are commission-free.

Which is better?

Now, let’s revisit Gary’s question: “Is it wise to purchase exchange-traded funds (ETFs)?”

Answer? Absolutely, Gary!

ETFs are a great, low-cost way to buy, own and sell diversified groups of stocks and/or bonds. But traditional mutual funds can be OK as well.

If you’re going to trade; i.e., buy and sell often, ETFs are better than mutual funds because you can get in and out easily. But if you’re going to invest for the long term (the only kind of investing I endorse) either will work. The key is to find funds that invest in the right type of securities, perform well and have low costs.

My advice for beginning investors? Start with an S&P 500 Index fund or ETF from Vanguard. The Vanguard ETF has one of the lowest expense ratios in the business: 0.03%, versus 0.14% for the mutual fund, so that’s probably the way I’d go. Take a minute and compare them both here.

Hope that answers your question, Gary, and I’ll see you all right here next time!

Got a question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter, just as you would with any email in your inbox. If you’re not subscribed, fix that right now by clicking here. It’s free, only takes a few seconds, and will get you valuable information every day!

The questions I’m likeliest to answer are those that come from our members. You can learn how to become one here. Questions should also be of interest to other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

Got any words of wisdom you can offer on today’s question? Share your knowledge and experiences on our Facebook page. And if you find this information useful, please share it!

Got more money questions? Browse lots more Ask Stacy answers here.

How to find cheaper car insurance in minutes

Getting a better deal on car insurance doesn't have to be hard. You can have The Zebra, an insurance comparison site compare quotes in just a few minutes and find you the best rates. Consumers save an average of $368 per year, according to the site, so if you're ready to secure your new rate, get started now.

Read Next
8 Key Steps to Planning for Retirement as a Couple
8 Key Steps to Planning for Retirement as a Couple

Ready for retirement? Not so fast. You might be surprised at some of the issues that come up for couples when they plan.

7 Surprising Things That Damage Your Credit Score
7 Surprising Things That Damage Your Credit Score

A seemingly small stumble can cause your credit score to plummet.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

5 Reasons You Should Retire Sooner, Not Later
5 Reasons You Should Retire Sooner, Not Later

Waiting until age 70 to retire isn’t for everyone. Could you be waiting too long?

This Is the Top Home Insurer — for 18 Years Running
This Is the Top Home Insurer — for 18 Years Running

Homeowners are increasingly unhappy with their insurance companies, but one stands out for the better.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

7 Unusual Ways to Declutter Your Home
7 Unusual Ways to Declutter Your Home

Tired of possessions weighing you down? Here are seven ways to declutter painlessly and effectively.

This Is the Most Popular Age for Claiming Social Security
This Is the Most Popular Age for Claiming Social Security

Both men and women are most likely to start receiving Social Security benefits at this age.

21 Things You Should Always Buy at a Dollar Store
21 Things You Should Always Buy at a Dollar Store

Dollar stores have great bargains on both everyday and occasional purchases.

6 Things You Should Never Buy at Trader Joe’s
6 Things You Should Never Buy at Trader Joe’s

We love Trader Joe’s for plenty of reasons. But think twice about this handful of products.

Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?
Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?

You could save more than $30,000 by setting aside these costly expenses for just one year.

Don’t Toss These 7 Household Items — Sell Them
Don’t Toss These 7 Household Items — Sell Them

Here’s how to earn cash as you give new life to these unwanted items.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have these documents that are crucial to their golden years — especially during a pandemic.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

Eat This Food If You Want to Avoid Alzheimer’s Disease
Eat This Food If You Want to Avoid Alzheimer’s Disease

One type of food associated with the Mediterranean diet offers especially large benefits.

5 Awesome Places You Can Retire Overseas on $2,000 a Month or Less
5 Awesome Places You Can Retire Overseas on $2,000 a Month or Less

In this week’s podcast: tips on retiring overseas — from someone who’s been helping American expats for decades.

11 Expenses That Quietly Drain Your Wallet
11 Expenses That Quietly Drain Your Wallet

It’s scandalously easy to overspend in these areas of your life.

9 Dumb Ways You Are Ruining Your Home Value
9 Dumb Ways You Are Ruining Your Home Value

Homeowners, beware these mistakes that can drive away potential buyers.

18 Amazon Purchases That We Are Loving Right Now
18 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

7 Tips for Building an Emergency Stockpile
7 Tips for Building an Emergency Stockpile

A pandemic or natural disaster could leave you reliant on your existing food supply. Is your pantry prepared?

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

15 Outrageously Overpriced Products — and How to Save on Them
15 Outrageously Overpriced Products — and How to Save on Them

Retailers mark up products by hundreds of times their cost — but you don’t have to pay the premium.

Why Half of Retirees Now Owe Taxes on Social Security
Why Half of Retirees Now Owe Taxes on Social Security

Growing numbers of seniors are paying taxes on their Social Security benefits, but you might be able to avoid this fate.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.