It’s true that ETFs and Mutual Funds have a lot in common. Under both types of investment one can enjoy a great amount of diversification using a blend of many different assets both in sector & geographical level.
There are some important differences though, which makes our professional team use only ETFs for all our portfolios:
Liquidity: ETFs are listed in global stock exchanges and trade like stocks meaning that we can enter or exit a trade when the market is open within seconds using our terminals. While Mutual Funds on the other hand settle in T+2 or T+3 sometimes, meaning that when someone decides to exit the investment, he will have to wait another 2 or 3 business days. This is increasing the risks of a portfolio dramatically in a volatile market.
Low costs: Mutual funds tend to have very high management fees like 1-2%, unlike the ETFs we choose averaging 0.10%-0.20% management fees. For a EUR100,000 portfolio it is an average difference of 1.35% or EUR1,350 per year.
Transparency: Because ETFs are listed securities, they must report their earnings daily unlike Mutual Funds.
Tax Advantages: It is known that ETFs can offer some tax advantages for investors. As they are passively managed strategies, they tend to realise fewer capital gains than actively managed funds.
Flexibility: Mutual Funds normally require much higher initial investments and incur high entry and exit costs and possible lock-up periods. While on the other hand ETFs can start from as low as few hundreds, have no entry or exit fee, and no lock-up period. Complete freedom.
For the above reasons we consider ETFs to be the single most effective way of long term investing.