This week’s Mullooly Asset Management podcast starts off with Tom telling Brendan about something he has heard a lot over the last 25 years. Many prospective clients have told Tom that they, “don’t have money in stocks, they own mutual funds!” Little do they know an equity mutual fund is just a basket of stocks. For that matter, Exchange Traded Funds (or ETFs) are a basket of stocks too. Many people don’t know mutual funds and ETFs share this in common. However, that is basically their only common characteristic. In this podcast Tom and Brendan talk about the difference between mutual funds and ETFs.
Tom and Brendan first examine mutual funds, and pull up an example. The example they use is the Fidelity OTC Fund (FOCPX). One thing Tom pointed out is mutual funds are only required to send out a semi-annual report. This means that you could potentially not know what stocks are in the mutual fund — other than when they are required to report it to you. You may or may not have to pay a sales charge when you buy or sell mutual funds, but there is always an expense ratio. The expense ratio covers things like commissions to buy or sell, management, administration, and even ads on TV.
Mutual funds also change price once per day: you get the closing price for the day whether you are buying or selling. This is because mutual funds do not trade on an exchange, and means that we cannot use stop orders or limit orders on them.
Exchange Traded Funds are also a basket of stocks, but that’s where the similarity to mutual funds end. Tom and Brendan look at the iShare Dow Jones Technology Sector (or IYW) as an example. ETFs often have a lower expense ratio than mutual funds (not in all cases). And holdings in ETF’s are available to be checked daily. You can use tools like Dorsey Wright and Associates AllETF.com to check holdings out. We can buy or sell ETFs at a specified price as well. This means that we can limit losses with stops and target our exit prices too, with limits. This also is advantageous to our point and figure charting strategy at Mullooly Asset Management.
As you can see there are an abundance of differences when it comes to ETFs and mutual funds! Tom and Brendan discuss even more differences in this week’s podcast so make sure that you tune in!