Tom Explains the Differences Between Funds
Transcript:
Easan Arulanantham:
What’s the difference between extreme exchange traded funds and mutual funds? Like pros and cons?
Tom Vaughan:
Yeah so exchange traded funds, are also known as an ETF, and a mutual fund. So mutual funds were first, they’re the oldest, they go back to 1920s, I believe late 20s was when they first started. And the concept behind a mutual fund is that they’re going out and creating a basket of security stocks or bonds, or the two biggest ones. And what they’re doing inside there, for the most part is holding on to that basket. Sometimes you have a manager, and so that managers buying and selling, say stocks for you, those are usually more expensive. You can buy index mutual funds, which don’t have a manager, you can buy the S&P 500, inside of a mutual fund. And just know those are a lot less expensive.
And so then an ETF came along more recently has the same aspects of the mutual fund. It’s a basket, you know, a grouping of different stocks or bonds.
There are some actively managed ETFs, but most of them are passive indexes as far as that goes. So pros and cons, on average, ETFs are cheaper on the internal expenses than the mutual funds. So that’s one of the things that really drove me towards exchange traded funds over mutual funds is that they were just cheaper. And then secondly, right now, when you look, I mean, we clear our business through TD Ameritrade. If we want to buy or sell mutual fund, there’s, it’s fairly expensive. It’s like $24 to buy or sell a mutual fund. But I can buy and sell a exchange traded fund for free. So that’s actually another really big difference, right? I like no transaction costs on the exchange traded fund.
One of the other big differences on exchange traded fund versus a mutual fund is exchange traded fund can be traded at any minute of the day, mutual fund only trades at the end of the day. And so you know, if the markets falling apart that day, and I want to get out, I can’t have to wait until the end of the day, every time to sell on a mutual fund. Whereas an exchange traded fund, I can, you know, kind of get out of there or buy it for that matter in the middle of the day, instead of having to wait till the end of the day. A couple of other key things that I think are quite important is if I like one of the things that happened, we had a tremendous run up, right. And he accounts from basically from the election all the way through the middle of February. And we had just things that were going up farther than I’ve ever seen in a short period of time. And it made me very nervous. And I wanted to put stop losses in place to be able to protect some of those gains. So we didn’t get wiped out when it came back down and it did come back down. And so you can’t stop losses where you just kind of draw a line, you know, in the sand, so to speak, and you want to sell when it gets to that point.
And I’m simplifying this, but you can’t do that in a mutual fund. But you can do that in a exchange traded funds. I do like that, I like that capability of being able to get out during the middle of the day. And to put in a stop loss. You know, at some point in time, there’s all kinds of things I could put in by orders above or below the market, I can put in sell orders above or below the market, all things that you can do with an individual stock. So exchange traded fund is like a combination of an individual stock and a mutual fund. I think it’s the fastest growing area in the investment arena right now is just that area of the exchange traded fund. And we use it a lot. I love exchange traded funds. It’s one of my favorite pieces. So I think they have a lot of advantages. They’re cheaper, both transaction costs and internal costs, you know, on average, you know, you can get in and out, you can set stop loss, you can write options against them. So we can do covered calls, put options, all kinds of things that you can’t do with a mutual fund. So just a lot more flexibility. I think everybody’s kind of waking up to that at this point in time.
Easan Arulanantham:
So you think of using mutual funds as kind of like a thing of the past now ETFs is the way to go if you have like a kind of like a comparable one?
Tom Vaughan:
Yeah, I think that’s right. I think that’s exactly what’s happening. You know, the outflows out of mutual funds has been quite high and the inflows into exchange traded funds has been quite high. So, I think, you know, what we’re seeing is a rotation to a to a better vehicle. You don’t have to see, we did get a chance here to see, you know, a boat in the 2008 downturn, how to had exchange traded funds hold up versus a mutual fund, you know, was is there price distortion that happened there was some, but nothing that would scare me out of those. We also had, you know, a downturn just last year saw some price distortion in ETFs. But they did quite well, actually. So, you know, because that’s one of the one of the pieces that people look at their exchange by the day instead of just at the end of the day. So yeah, I definitely think the rotation to exchange traded fund is happening. I don’t know that mutual funds be a thing of the past only because it’s just amazing amount of money in them in total. And no matter what the situation money tends to stick around, at least some of it right. So there’ll be there’ll be plenty of money in some of these mutual funds going forward. . .