For the knowledgeable, active investor who wants to participate in big picture trends, the Exchange Traded Fund (ETF) has many advantages over the traditional Mutual Fund. ETFs are far more transparent, efficient and economical.
Be A Control Freak.
You know it’s true: the only person who really cares about the health of your portfolio is you. Using Mutual Funds to increase your net worth is like depending on the school cafeteria to improve your kids’ diet. They act in their own self interests which are influenced by a lot of political elements you’ll never be privy to.
Sector specified Mutual Funds are usually handled by the less experienced staff members. They will be wanting to prove their value to their fund family, and growing your portfolio will be second to that goal. More experienced staff manage the larger mutual funds, and their actions in the fund are often influenced by powers and motivations not known outside their company. Mutual Fund prices are not influenced by fluctuations seen in the market throughout the day so any buy/sell orders are done on the opening price of the day.
The stocks within the ETF are the only influences moving it. You need not be concerned with outside influences effecting the funds manager. Outside the unusual events of bankruptcy, mergers and delising, the ETF contents will hold steady. You also have the power to buy/sell/exchange at any point during the day. If you see news that will effect a fund that you want in or out of you can go ahead and buy/sell/exchange.
Knowledge is Power.
As an active trading investor, you follow the markets and keep abreast of the political and economic trends. Why would you want to turn over the power to act on that information to a third party Mutual Fund manager?
Fund managers, in order to protect their turf, restrict the information they share with fund share holders to the legal requirements. During the lag time between reporting periods, they may move in and out of positions, even change the fund’s primary focus, without your knowledge. Additionally, “window dressing” to create the illusion of a fund holding this quarter’s winning stocks, is a time honored tradition that results in selling low and buying high, never a good way to make money.
Transparency is built into ETFs. They establish their holdings and are committed to retaining them. You know at all times what you own and you can clearly see the results of your decisions to buy or sell the fund. There’s no need to dress-up a quarterly statement for reporting.
Taxing Issues.
Buying and selling in Mutual Funds will happen without consideration for personal tax impact on the shareholders. The Funds act of selling for redemptions and buying to utilize newly invested monies can result in short term gains and an increased tax burden for you. THe year-end capital gains dispersment can give you Phantom Gains that require you to pay increased taxes. The likelihood of this happening with ETFs is greatly reduced.
You control when you make ETF trades. Say you want to keep your earnings in a lower tax bracket and can do that by delaying a sell. You can take that risk. You aren’t limited by the amount of cash you can hold so you decide when to put new monies or reusable money to use. You also have access to up to date portfolio information any time you need it…. including taxable earnings, which can make tax planning a whole lot easier.
Lower Fees and More Options.
If you want to control assets not own them, look to individual securities and EFTs. With traditional Mutual Funds that is not an option. With Mutual Funds, you also pay management salaries and bonuses even when labeled “no load”, you just don’t see them. These unseen expenses are taken out before your earning are posted in your account, making your gains even smaller.
With no need for a manager to constantly tweak an EFTs holding, and no question about what went out the back-end, the EFT has very low fees. As a hands-on trader, keeping an eye on the big picture, ETFs win out over Mutual Funds every time.
For those who still think they can set it and forget it, letting a professional fund manager decide what to put their money into, they’re going to pay for that privileged with their hard-earned money; working years longer than the investor taking control of their own accounts with EFTs and a proven trading system.
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