ETFs vs. Mutual Funds: The Ultimate Guide

Exchange Traded Funds or ETFs have become the darling of the inventing world and they are giving mutual funds a run for their money. As much as both of them are viable investing choices, it is very important that as an investor, you familiarize yourself with the similarities and the differences both of them have to offer. With the right information, you can make an informed investment decision. This article discusses ETFs vs. mutual funds and will help you make that informed decision.

MUTUAL-FUND

MANAGEMENT

ETFs are index funds, which means that they are managed passively and track indexes. There are some ETFs that are managed actively but they function more like mutual funds and hence have higher fees. On the other hand, mutual funds are run by professional managers that attempt to beat the market. Due to the active management, mutual funds tend to have higher costs.

Some people think it is worth paying for the professional management and hence go with mutual funds but research indicates it is not. Funds that are actively managed rarely beat the market and as an investor, you have better chances of higher returns when you invest in low-cost index funds like ETFs.

TRADING

It’s a fact that ETFs are index funds but they come with a twist. ETFs are traded like stocks through the day and their prices are normally based on demand and supply. On the other hand, mutual funds are priced and traded at the end of every trading day.efts stock graph

Due to the fact that ETFs are like stocks when investors buy or sell, they pay some commissions. Nowadays, however, there are some brokerages that offer commission free ETFs and you should choose a few of these when investing. The commissions might not seem much but if you invest every month, it will add up very fast.

When investing in commission-free ETFs, you should consider the expense ratio because some of these funds have high expenses in order to make up for commissions. When investing with ETFs, keep in mind that they are not meant for day trading, you have to hold on to yours for a given number of days or you will be charged.

EXPENSE RATIO

The expense ratio is what indicated how much an investor pays every year in order to own a fund as a percentage of what they invested. ETFs are considered quite inexpensive with some of them carrying expense ratios of 0.01%, which means an investor pays $1 for every $1,000 they invest each year.

However, you should not assume that this means they are the cheapest option out there. Index funds, for instance, are worth considering but in general, mutual finds higher expense ratios than both index funds and ETFs.

TAX EFFICIENCY

ETFs are a lot of tax efficient compared to mutual finds due to the way they are managed. This is important to consider if the exchange traded fund is within a taxable account and not in a retirement account, which can be tax-advantaged like 401(k) or IRA.

financial and investment productsTHE STARTING MINIMUMS

Mutual funds can have very high entry costs that could even be a minimum of $1,000. However, ETFs are usually purchased by a share and this makes them inexpensive.

THE SELECTION

This might be the one area ETFs fall short. Despite the fact the ETFs have really grown in popularity, there are more mutual funds available. You will find an ETF that meets your needs but you will not have a lot to select from compared to mutual funds.

LIQUIDITY

Liquidity is normally measured by the trade volume. If the interest is low and the trading volumes are low then the spread increases. These forces sellers to offer price discounts so they can get the security sold and causes the buyers to pay price premiums. ETFs are somewhat immune to this because their liquidity is not influenced by trading volumes. ETFs liquidity is influenced by the liquidity of the stocks included on that index.

Final thought

As an investor, you should not assume that all investments are low cost. Ensure you consider all potential fees even for ETFs. They are inexpensive compared to mutual funds but you still need to know what you are doing. All in all, if you are looking for the better option, you need to consider all these aspects and decide which one will work best for you.

How to Read a Company’s Income Statement

Whether you’re receiving income statements for your company or creating them yourself, they’re notorious as complicated and scary. But they don’t have to be. Here’s a simple guide of how to read a company’s income statement.company-income

The Main Terms and Their Meanings

Perhaps the most daunting aspect is the terminology, but here’s the basic breakdown.

  • Statement of Income, Statement of Earnings, Statement of Operations, Statement of Operating Results = Income Statement.
  • P&L Statement = Profit & Loss Statement = Income Statement
  • Gross = the profits before dedications
  • Net = the profits after dedications
  • Net Income, Net Earnings, Earnings = final profit (since Statements rarely, if ever never, use the term “profit”).

Multi-Step vs. Single-Step

Close-up-US-income-tax-formDepending on the size and complexity of your business, your income statement can take two forms – multi-step, where there are more expenses and points of income calculated, and single-step, which is more refined. To see the differences and their terms, read here, but for now, let’s cover the real heart of your statement.

The Structure

The Statement will begin by listing the business and the period of time the statement concerns.
Below this will be the body – where the numbers game begins. Read from top to bottom, starting with Sales Revenue and ending with Net Income, which is essentially how much money you started out with and how much is yours by the end.

Along the way, deductions will be made to cover:
Income Tax Expense.
Cost of Goods Sold (= manufacturing).
Administrative, Selling, and General Expenses (= employee wages, advertisement, legal fees, insurance premiums, etc.).
Research and Development (which made be included in the above category, depending on if you have a multi- or single-step Statement).
Etc.
It’s important to note that these deductions will not be characterized by parenthesis, minuses, or any similar symbols. Instead, the Gross Income will always be followed by a deduction. After which, a strong line will separate the profit into another section, where it will be accompanied by an additional deduction. The purpose behind this is to constantly draw your eye downward to the final Net Income.

At the end, the Net Income will likely be underlined, put in bold, or have a different font type. This is why it’s called “the bottom line.”

The Real Purpose Behind Income Statements

It’s important to remember these Statements are designed to give you a very brief but very crucial insight. They will not go into detail on how broad or narrow the deductions are, or how simple or extensive your profits are.marketanalysis

The Most Important Part to Watch

While each line offers valuable insights, the most crucial of them all is the Cost of Goods and Sales Revenue line. This shows you how much it cost to manufacture the products sold versus how much was actually made, before further deductions are counted. Since the Cost of Goods will likely be the largest expense you have, keeping a close eye on any spikes and evaluating ways to lower this price will give you the most pleasing Net Earnings in the next statement.
The profit after the Cost of Goods deduction will be known as a Gross Margin; always watch the Gross Margin.

What is Most Commonly Grouped Together?

Income Statements often become more confusing when expenses are lumped together, but it’s a common practice to improve efficiency. The most common combination is in the Operating Costs. Rather than itemizing Administrative, Selling, and General Expenses, your Statement will likely put them into that single umbrella term.