Mutual Funds or ETFs?

By | March 18, 2012

When the market raced down hill, I and most of those who had couple of bucks in the market, raced to the exit doors. Some of the money I had was in my retirement plan and that meant in mutual funds that were approved by my employer at that time. Making a decision to sell or buy these is usually much harder.

The reason is that you have to submit your order before the marker closes but you do not know what is the execution price till the market closes and the dust is settled. If you watched the market during the the free fall of 2008 and 2009, you would have seen how most of the moves were during the last 15 minutes. And I admit that I made a lot of money waiting for the 3:30 or 3:40 ET signal, up or down.

After that I made a decision not to deal with mutual funds and move my money to ETFs, Electronically Traded Funds. These are like the mutual funds, a collection of stocks, but unlike the mutual funds they are traded like a stock. That means the what you see is what you get. One of the down sides to this option is that ETFs do not have a NAV, Net Asset Value. So if your ETF has say 10 stocks of Boeing and ten stocks of Johnson and Johnson, and if the former is priced at $100 a share and the latter is priced at $50 a share, the total value of the  ETF is not $1500. So if the ETF has 10 trades shares that means each is not necessarily $150. Because it is traded like a stock, it is subject to supply and demand. So it maybe $145 or $155 for example.  So there is a built in premium or discount you are subject to. 

The way I think about it is that I am accepting a little bit of ambiguity for the agility of the security. Every time the the market jerk up and down, I remember this equation. 

 

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