Mutual Funds vs ETFs

September 26, 2009

- is one investment better than the other and how does it fit into a client’s financial plan?

Trendline Financial  Solutions is a Financial Planner Firm offering Financial Planning and Investment Management with offices in Southold and West Hempstead, NY.Trendline Financial Solutions utilizes ETFs and Mutual Funds in its client portfolios. We have added descriptive articles in other Posts that explain how ETFs and Mutual Funds work. Now, how about a comparison of ETFs and Mutual Funds. Are one better than the other in Investment Management portfolios and do they fit into a clients Finanacial Plan.

The following article was written by the ETF Guide:

ETFs vs. Mutual Funds

It’s important for investors to understand the key differences between traditional mutual funds (open-end) and exchange-traded funds (ETFs). Each has its advantages and disadvantages. This knowledge can translate into making informed investment decisions. Let’s focus on the key points.Fees

The expense ratios of ETFs are generally lower versus active mutual funds and in some cases, even lower than index mutual funds. Also, ETFs often have lower trading costs versus actively managed funds, due to their low portfolio turnover. The ETF cost savings can be significant, especially for long-term investors. Investing in ETFs will usually result in a brokerage commission, but the savings from lower expense ratios can help to offset these transaction costs. Also, ETFs do not impose back end redemption charges like many mutual funds. Information on specific fees, charges, and expenses is obtained in the fund prospectus.


Mutual Funds

Exchange-Traded Funds

Continuous trading and pricing throughout the day?



Can be bought on margin?



Can buy/sell options?



Sold by prospectus?



Can use in an IRA, 401(k), or another retirement plan?



Can be purchased through a traditional or online broker?



Minimum investment or share amount required ?

YES (2)


Redemption Charges for Early Withdrawals



Traded on what exchanges?



Fund Transparency and NAV

Actively managed mutual funds report their holdings on a quarterly or semiannual basis, whereas exchange-traded funds disclose their portfolio holdings on a daily basis. This provides ETF investors with a greater degree of financial transparency. The ETF performance and portfolio composition are a reflection of the underlying index. Consulting the index provider’s Website is another way of easily identifying the underlying holdings of an index ETF.Mutual funds are bought and sold at net asset value (NAV), which is determined by subtracting a fund’s liabilities divided by the number of shares outstanding from the value of a fund’s total assets. All buy and sell transactions are conducted directly with the fund company. In contrast, ETFs are bought and sold on a stock exchange based upon market prices, which fluctuate according to supply and demand.ETFs generally trade close to their net asset value. It’s rare to see ETFs trading at a large premium or discount to their NAV, but it can happen. Historically, institutions have seen this as an arbitrage opportunity by creating or liquidating creation units. This process keeps ETF share prices closely hinged to the NAV of the underlying index or basket of securities.Taxes and Portfolio Turnover

Annually, both mutual funds and ETFs are required to distribute dividends and portfolio gains to shareholders. This is usually done at the end of each year and these distributions can be caused by index rebalancing, diversification rules, or other factors. Also, anytime you sell your fund this could generate tax consequences.For U.S. investors ETFs held in a taxable account with qualified stock dividends and long-term capital gains are typically taxed at 15 percent. Short term gains are levied at federal income tax rates. While ETF distributions tend to be infrequent, tax consequences can be incurred even if an investor decides to hold their shares.

ETFs are renowned for having low portfolio turnover, which is good for investors, because it reduces the possibility of tax gain distributions. Among other benefits, ETF investors are insulated from the activity of fellow shareholders, whereas mutual fund investors aren’t. Mutual fund managers are often forced to sell portfolio holdings to meet the redemption demands of exiting shareholders. Remaining fund shareholders are adversely impacted because they absorb the tax gains and losses triggered by these untimely sales. ETFs avoid this problem because they are bought and sold on an exchange, therefore investors don’t affect the tax consequences of each other.

Trendline Financial  Solutions is a Financial Planner Firm offering Financial Planning and Investment Management with offices in Southold and West Hempstead, NY

What is a Mutual Fund

September 25, 2009

- and how does it fit into my Financial Plan and Investment Management Strategy?

What You Should Know About Mutual Funds

Trendline Financial  Solutions is a Financial Planner Firm offering Financial Planning and Investment Management with offices in Southold and West Hempstead, NY

Trendline Financial Solutions makes use of Mutual Funds, among other investments, in its Clients’ investment portfolios. Therefore I am reprinting an article written by the Massachuetts Securities Division which explains how Mutual Funds work and possible issues that investors should understand about these investment vehicles.

There are a number of investment options available to you as a consumer. Many people have chosen mutual funds as their primary means of investing. Mutual funds provide professional management, diversification, convenience and liquidity. As with all investments, mutual funds are not risk free. It is essential that you make an informed investment decision and choose a mutual fund which is right for you depending on your goals, investment time frame and risk tolerance.

Many questions can arise when it comes to mutual fund investing. What is a mutual fund? What are the different types of mutual funds? How do I choose a fund that is right for me? What are the risks? This pamphlet is designed to help answer these basic questions.

Mutual Fund Tips

  • Determine your investment objectives. What is your invest ment goal: preserving principal; generating income; paying for a child’s education; or saving for retirement? Choose a mutual fund whose objective is in line with that goal.
  • Thoroughly understand the risks associated with the mutual fund you are considering and be sure that you are comfort able taking on those risks.
  • Read and understand all information in the fund’s prospectus, Statement of Additional Information, and, if available, its annual report. Call the fund company or the Securities Division if you have questions regarding these materials.
  • Take the time to study the fund’s fee table. Compare the fees among various fund groups before choosing a fund. These fees are expenses of the fund and will significantly affect your returns.
  • Depending on your own investing experience, decide whether you should invest in a fund directly or through a broker -dealer. A broker-dealer can provide investment advice but will charge a sales load. In some funds you can invest directly without the assistance of a broker-dealer. These funds do not charge a sales load but do not give investment advice.
  • If you are investing through a broker-dealer or utilizing the services of a financial advisor, contact the Securities Divi sion to see if your broker or financial advisor is registered in Massachusetts or has any past disciplinary matters on file.
  • If you are investing in a mutual fund sold at your bank or credit union, make sure you understand that the fund is not an insured deposit and that it is not guaranteed by the financial institution, the FDIC or any other federal agency.

What Is a Mutual Fund?

A mutual fund, also called an investment company, is an investment vehicle which pools the money of many investors. The fund’s manager uses the money collected to purchase securities such as stocks and bonds. The securities purchased are referred to as the fund’s portfolio.

When you give your money to a mutual fund, you receive shares of the fund in return. Each share represents an interest in the fund’s portfolio. The value of your mutual fund shares will rise and fall depending upon the performance of the securi ties in the portfolio. Like a shareholder in a corporation, you will receive a proportional share of income and interest gener ated by the portfolio. You can receive these distributions either in cash or as additional shares of the fund. As a shareholder, you also have certain shareholder voting rights.

A mutual fund’s portfolio is managed by a professional money manager. The manager’s business is to choose securities which are best suited for the portfolio. Be aware, however, that even a profes sional money manager cannot insure against a loss of principal.

The mutual fund manager will invest in many different securities. This diversification of portfolio assets means that you as an investor have not pinned all your hopes on one company’s success. Also, because the portfolio holds many securities, the negative impact that any one company may have on the fund is diminished. While diversification is a benefit of mutual fund investing, a mutual fund is still impacted, either favorably or unfavorably, by the ups and downs of the market in general.

Mutual funds provide a relatively easy way to invest. Most funds have a minimum investment of $1000. In addition, a mutual fund stands ready to buy back, or redeem, your shares at any time. This liquidity allows you to get your money when needed. There is no guarantee, however, that your shares at the time of redemption will not have decreased in value.
Types of Mutual Funds

The types of mutual funds vary according to the fund’s investment objective. A fund’s investment objective will usually seek capital gains (gains from the sale of portfolio securities), income (interest and dividends earned on the portfolio securi ties) or a combination of both. While not a comprehensive list of all mutual funds, the basic types of funds are described below.

Money Market: A money market fund seeks safety of principal by investing in high quality, short-term securities. This type of fund is designed with the aim that an investor’s principal should not decrease in value. There is no guarantee, how ever, that this will always be the case. A money market fund seeks to provide a regular distribution of income which is determined by short-term interest rates.

Growth: A growth fund invests primarily in the common stock of well established companies. This type of fund may invest for long-term capital gains and is not intended for an investor who seeks income.

Aggressive Growth: Like a growth fund, an aggressive growth fund will invest primarily in common stock for long-term capital gains. An aggressive growth fund may invest in the common stock of small companies, out-of-favor companies or companies in new industries. It, therefore, has a higher degree of risk than a basic growth fund.

Income: An income fund invests in either corporate, govern ment, or municipal debt securities. A debt security is an obligation which pays interest on a regular basis. Hence, this type of fund is designed for investors who desire periodic income payments. There are, however, substantial differ ences and varying degrees of risk among income funds depending on the credit quality of the debt issuer, the maturity of the debt instrument, and prevailing interest rates.

High Income: This category of income fund seeks to achieve a high degree of income by investing a material portion of its portfolio in below investment grade debt securities or junk bonds. These funds have a high degree of risk and should be purchased by investors who can incur the risk of loss of principal.

Balanced: A balanced fund, as the name implies, invests for both growth and income. The fund will invest in both equity and debt securities. A balanced fund seeks to provide long-term growth through its equity component as well as income to be generated by the portfolio’s debt securities.

Balancing Risk with Investment Goals

Do not let anyone tell you that mutual funds are free from risk. While risks vary depending on the fund, the potential danger is the same – loss of principal and income. You must determine your own risk tolerance level. This determination should be made with your investment goals in mind. Risks that may be acceptable for a long-term investor seeking capital appreciation may not be suitable for an investor seeking income and principal protection. The following chart is intended to provide you with a starting point for matching mutual fund objectives with your risk tolerance. Be aware that not every fund designed to meet one of the stated objectives will have a similar degree of risk. You should refer to the fund’s prospectus to determine the risks associated with a fund.

Fund Objective/Degree of Risk
Money Market/Low
Growth/Medium to High
Aggressive Growth/High
Income/Low to Medium
High Yield/ High
Disclosure Documents

The Prospectus

The fund’s prospectus is one of the most important docu ments to read when purchasing a mutual fund. It supplies the material information you will need to make an informed invest ment decision. Information is also available in the prospectus on certain administrative aspects of the fund, such as buying, redeeming and exchanging shares.

The Statement of Additional Information

The SAI includes information which supplements what is disclosed in the prospectus. A fund’s audited financial statement and a list of its portfolio holdings are included in the SAI, as well as in the annual report (see below). Because the SAI has been legally incorporated into the prospectus, it will be assumed that you have read it. Hence, you should always ask for a copy and read the SAI before investing in a mutual fund.

The Annual Report

The annual report is forwarded to a fund’s shareholders at the end of each fiscal year. It includes the fund’s audited financial statements and a list of the fund’s portfolio securities. Unless otherwise included in the prospectus, a fund will include in its annual report a line graph comparing its performance to that of an appropriate broad-based securities market index, as well as a discussion of those events, strategies and techniques which affected its performance during the past fiscal year. An annual report includes material information which may not be available in other disclosure documents and, if available, should be read by a potential investor.
Mutual Fund Sales Charges

A mutual fund which sells its shares directly to investors without paying sales commissions to broker-dealers is referred to as a no-load fund. When you invest in a no-load fund your entire investment goes into buying shares of the fund. However, because you are not paying a commission to a broker-dealer, you will not receive financial advice.

When financial advice is needed, some investors choose a load fund. A load fund pays a broker-dealer a sales commission. The amount you invest in the fund is decreased by the payment of the sales commission. Some load funds, rather than charging the sales commission at the time of the sale, charge the fee when money is taken out of the fund. This fee is referred to as a contingent deferred sales charge or a back-end load. The back -end fee will usually decrease to zero the longer an investor remains in the fund.

Another sales-related expense, which is often overlooked by investors, is the 12b-1 fee. This fee, which is disclosed in the fund’s fee table, can be used by the fund for marketing, advertis ing or sales commissions. Because the 12b-1 fee is a charge against the fund on an annual basis, an investor could over the long term pay more in 12b-1 fees than would have been permis sible as a maximum front end sales load.

Many load funds offer investors the option of paying the sales load up-front, back-end or a combination of a reduced sales commission and a 12b-1 fee. These sales-related options are called classes of fund shares. You should choose the class that best matches your needs and investment time frame.
Additional Information

If you have a problemunderstanding any aspect of your mutual fund contact the fund directly. Most funds have a toll- free number on the front page of the prospectus for this purpose. There are also a number of private organizations which publish consumer guides which address mutual funds. For more informa tion, you may wish to contact the Investment Company Insti tute at 202-326-5872. The Division also has a brochure to help clear up any investor misconceptions concerning the sale of mutual funds and other investment products sold on bank premises. You can contact the Office of the Massachusetts Secretary of State, Securities Division for this brochure, as well as for general information concerning your mutual fund, broker -dealer or financial advisor.

Trendline Financial  Solutions is a Financial Planner Firm offering Financial Planning and Investment Management with offices in Southold and West Hempstead, NY

Basics of Electronically Traded Funds (ETFs)

September 24, 2009

- as used in Financial Planning and Investment Management

Trendline Financial  Solutions is a Financial Planner Firm offering Financial Planning and Investment Management with offices in Southold and West Hempstead, NY

Trendline Financial Solutions, as part of the Financial Planning and Investment strategies, utilizes ETFs in client portfolios for a number of reasons. I am printing an article from the American Stock Exchange which describes Basics of ETF investment dated February 28, 2006. I welcome comments if you find the article educational.

Exchange traded funds offer individual investors:

-advantages of stocks and mutual funds combined

-lower fees (ordinary brokerage commissions apply)

-lower capital gains taxes

In recent years, these unique features and benefits have helped exchange traded funds explode in popularity and emerge as one of the most flexible, multi-purpose investment vehicles available. Ever since the American Stock Exchange pioneered the concept of a tradable basket of stocks with the creation of the Standard & Poor’s Depositary Receipt (SPDR) in 1993, exchange traded funds have evolved into an entirely new investment category. Today, the number of ETFs listed and traded at the Amex has grown to more than 100 and continues to grow—not only in the number of products and their variety—but also in terms of assets and market value.

What are exchange traded funds?

Exchange traded funds (ETFs) are index funds or trusts* that are listed on an exchange and can be traded intraday. Investors can buy or sell shares in the collective performance of an entire stock or bond portfolio as a single security. Exchange traded funds add the flexibility, ease, and liquidity of stock trading to the benefits of traditional index fund investing.

The American Stock Exchange lists ETFs on more than 100 broad stock market, stock industry sector, international stock, and U.S. Treasury, and corporate bond indexes, providing a wide array of investment opportunities. ETFs provide a simple and effective way to invest in equity markets worldwide and the U.S. bond market. Investors can establish long-term investments in the market performance of the leading companies in the leading industries in the United States or abroad, or tailor asset allocations using diversified investments in stocks in particular industries or countries or in U.S. bonds.

The advantages of ETFs:

Tax efficiency
ETFs, like index funds in general, tend to offer greater tax benefits because they generate fewer capital gains due to low turnover of the securities that comprise the portfolio. Generally, an ETF only sells securities to reflect changes in its underlying index. Exchange trading of ETFs further enhances their tax efficiency. Investors who want to liquidate shares in an ETF simply sell them to other investors through exchange trading. Because of this unique structure, ETFs are not required to sell securities to meet investor cash redemptions, potentially generating capital gains tax liability for remaining investors. Keep in mind that the sale of an ETF will generate capital gains/losses for the investor liquidating shares.

Lower costs
Expenses can have a significant impact on returns for investors. ETFs, in general, have significantly lower annual expense ratios than other investment products. ETFs are less likely to experience high management fees because they are index-based, not “actively” managed. And, since they trade on an exchange, ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. Of course, an investor selling ETF shares may realize capital gains or losses, as with common stocks. Purchases or sales of exchange traded funds are subject to brokerage commissions.

ETFs are designed to generally replicate the holdings and correspond to the performance and yield of their underlying index.

Buying and selling flexibility
Because they are exchange traded, ETFs can be:
-bought and sold at intraday market prices
-purchased on margin
-sold short, even on a downtick (unlike common stocks)
-traded using stop orders and limit orders, which allow investors to specify the price points at
which they are willing to trade

All day tracking and trading
ETFs are priced and traded throughout the day, and are not restricted to once-a-day trading at the end of the day. And because the pricing of ETFs is continuous during trading hours, investors will always be able to obtain up-to-the-minute share prices from their broker or financial adviser. For delayed quote information on Amex-listed ETFs, click here.

Because each ETF is comprised of a basket of securities, it inherently provides diversification across an entire index. Additionally, the expanding universe of ETFs available at the American Stock Exchange offers exposure to a diverse variety of markets, including:
broad-based equity indexes (such as total market, large-cap growth, and small-cap value)
broad-based international and country-specific equity indexes (such as Europe, EAFE, and Japan)
industry sector-specific equity indexes (such as healthcare, energy, and real estate)
U.S. bond indexes (such as long-term Treasury bonds and corporate bonds)

Dividend opportunities
Dividends paid by companies and interest paid on bonds held in an ETF are distributed to ETF holders, less expenses, on a pro rata basis. Of course, not all companies will pay dividends. Based on past performance, few, if any, distributions can be expected from certain ETFs. There may also be opportunities for reinvestment of distributions.

Wide array of investment strategies
Investors can capitalize on the convenience and flexibility of ETFs to pursue a wide variety of investment strategies.

Core investment — Investors can use ETFs as a core investment for their portfolio. The purchase of shares in a single ETF can provide broad market exposure of a portfolio of stocks or bonds for long-term holding that is easy to establish, easy to track, inexpensive, and tax efficient.

Portfolio diversification — ETFs cover virtually every segment of the equity market and several segments of the U.S. bond market, providing an easy and convenient way to adjust the investment mix of a core portfolio.

Hedging — Exchange traded funds can be purchased on margin and sold short (even on a downtick), which has opened up risk management strategies for individual investors that were once available only to large institutions. For example, ETFs can be sold short to hedge a core stock portfolio or interest rate fluctuations. This allows investors to keep their portfolio intact while protecting them from market losses. In a declining stock market or rising interest rate environment, profits from a short position can offset some of the losses in a portfolio. (Investors are required to make arrangements to borrow securities before selling short.) Listed options, available on some ETFs, also offer opportunities for additional hedging or to increase income. Investors should contact their broker regarding initial and maintenance margin requirements. To view a list of ETF options that are listed at the Amex, click here.

Cash management — ETFs have often been used to “equitize” cash, providing a way for investors to put cash to work in the market or maintain allocation targets while determining where to invest for the longer term.

Rebalancing — Investors can adjust ETF positions at any time throughout the trading day, without redemption fees or short-term restrictions. Again, usual brokerage commissions will apply.

Tax loss strategy — An investor can sell a security that is underperforming and claim a tax loss but retain exposure to its sector by investing in an ETF. Consult a tax advisor about a tax loss strategy.

Risks and other considerations

ETF shareholders are subject to risks similar to those of holders of other diversified portfolios. A primary consideration is that the general level of stock or bond prices may decline, thus affecting the value of an equity or fixed income exchange traded fund, respectively. This is because an equity (or bond) ETF represents interest in a portfolio of stocks (or bonds). When interest rates rise, bond prices generally will decline, which will adversely affect the value of fixed income ETFs. Moreover, the overall depth and liquidity of the secondary market may also fluctuate.

An exchange traded sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based.

International investments may involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, or economic, political instability in other nations.

Although exchange traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.


Peter B. Owen

1675 Cedar Beach Road, Southold, NY 11971

223 Parker Avenue, West Hempstead, NY 11552

21 West Mill Drive, Great Neck, NY 11021

Phone: (516)317-2860

Email: info@trendlinefinancialsolutions————–

Website :

Trendline has Financial Planning and Investment Management offices in Southold, Great Neck and West Hempstead, serving all of Nassau County, Suffolk County and Queens County. Convenient access for Financial Planning clients in Garden City, Rockville Centre, Manhassett, Port Washington, Mattituck, Greenport, Jamesport