Mutual Funds vs. ETFs: A Comparison

stock market graphics

By Jeff Headrick, Financial Planner

March, 2019

I often get calls from Dave Ramsey listeners looking for that perfect mutual fund. They want a fund with experienced management, lower expense ratios, and insanely high returns. And while these types of funds do exist, they are not always that easy to find.

I also get questions, though not as many, about ETFs. ETFs, or exchange traded funds, are the younger brother to mutual funds. According to bankrate.com, mutual funds currently manage 6.7 trillion of assets, while ETFs only have about 1.7 trillion. But the trend is shifting every year, mainly due, I believe, to lower expense ratios.

If you want to know exactly how the two are structured here is a good article recently published that explains the nuances between the two from a technical perspective.

ETFs and Mutual Funds: More Similar Than Different

From a big picture perspective, they are more similar than different. They both contain large “baskets” of stocks. Not just one or two. Many mutual funds and ETFs contain several hundred stocks and bonds. So, with the same energy it takes to buy $10,000 worth of Apple stock, you can buy Apple, Microsoft, and many other great companies with the same number of key strokes.

American Funds Growth Fund of America

American Funds Growth Fund of America meets many of the criteria sought after by Dave Ramsey fans and other investing enthusiasts. The management tenure varies, but it looks like the youngest manager of this fund has 18 years of experience and the oldest manager has 32 years of experience. American Funds is one of a few companies that uses a multi-manager approach, and historically it has served them very well.

This fund also has a low expense ratio compared to its peers. For Class A shares the current fund expense ratio is 0.64%. Compare this to the industry average of 1.15% (Lipper Large-Cap Growth Funds average) and you can see how little things like expenses can make a big difference over time.

Finally, this fund has averaged a net return of 11.71% over the last 10 years. If we go back to the fund’s inception in 1954*, we can see a net return of 13.53% (Class F-2 shares).

mutual fund and etf performance

Vanguard Large Cap ETF

The Vanguard Large Cap ETF does not meet standard management criteria of 10 years or more per manager. The reason for this is that the Vanguard Large Cap ETF is not an actively managed fund. It is a passive fund, that attempts to mirror the return of the market. For this reason, it does not need a dozen highly compensated people on the payroll, therefore reducing its expenses significantly.

The expense ratio of this fund is 0.05%. The American Funds portfolio had an expense ratio of 0.64%. So, in terms of expense ratio, the American Funds portfolio is over 12 times higher than that of its Vanguard peer in terms of expenses.

According to recent data from Vanguard which I will share below, the Vanguard Growth ETF has averaged a net return of 14.53% over the last 10 years. If we go back to the fund’s inception in 2004**, we can see a net return of 8.07%.

Two Great Investment Options

I have used a combination of mutual funds and ETF’s over the years. Both are excellent investments for the long-term investor. You may find it of interest that even the top five holdings in the funds are identical. They both hold Apple, Amazon, Alphabet, Microsoft, and Facebook.

But to understand which investments are right for you, and how you should best go about constructing your own portfolio, I would highly recommend you seek a licensed and qualified financial professional. Even Dave Ramsey does not choose all of his investments on his own. Rather, he relies on a financial advisor to help him with the process. Here is a good video where Dave shares his take on How to Find a Reliable Financial Advisor.

I hope you enjoyed this article, and that it brings some inspiration to your investment thought process. Thanks for reading.

Related:

Four Principles of the Successful Investor

Your 401(k) and the Efficacy of Asset Allocation

 

Resources:

American Funds Growth Fund of America

American Funds Global Growth Model Portfolio

Vanguard Growth ETF

https://www.bankrate.com/investing/mutual-fund-vs-etf-which-is-better/

 

We can be reached at (910)448-1450, or you can click here if you’d like to schedule an initial conversation.

 

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