Choosing Between Mutual Funds and ETFs
The decision to own a mutual fund or an exchange-traded fundis dependent on a variety factors. Both types of investments have advantages, but individual investors should not feel compelled to switch from one to another. Rather, investors should first consider the following factors and then consider the investment that is best for them.
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What Are Your Portfolio Diversification Needs?
The first step when choosing among funds is to determine what your portfolio needs are. For example, do you need exposure to domestic small-cap stocks or municipal bonds? The answer to this question will be determined by what asset classes further diversify your portfolio and keep your investing risk within your tolerance limits.
Knowing what asset classes you want to target helps you in two ways. First, it narrows your search to a smaller, more targeted group of funds. Secondly, it makes comparisons between funds easier. A fund investing in emerging market debt will have different return characteristics and higher expenses than a fund that invests in U.S. blue-chip companies.
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