Why ETFs Are Better than Mutual Funds, in Two Charts

by on April 21, 2014 | ETFs Mentioned:

Though some may disagree, exchange-traded funds have certainly proved their worth over the years. With more than 1,500 products to choose from, more and more investors have turned to the ETF wrapper, embracing the vehicles’ low-costs, efficiency, and many other advantages. Consequently, total assets of the ETF industry have swelled to over $1.7 trillion [see also 7 Charts to Put the ETF Industry in Perspective].

Some investors and industry professionals, however, have not yet come to embrace these products, preferring mutual funds instead. For those who need some convincing, we’ll try to show you why ETFs are better than mutual funds, in two charts.

For this exercise, we take a look at the popular Emerging Markets ETF (VWO, A), comparing it to the GS Emerging Markets Equity Fund (GEMCX). First, a comparison of expenses:

The GEMCX mutual fund charges a hefty expense ratio of 2.65%. VWO, on the other hand, charges a mere 18 basis points. Additionally, VWO can be traded commission free on FirstradeTD AmeritradeVanguard platforms [see also Understanding the Mutual Fund vs. ETF Cost Difference].

Key Takeaway: ETFs are cheaper.

Both GEMCX and VWO offer exposure to emerging market equities, and though both funds follow the same objective, the chart above clearly shows how different management styles and structures can affect bottom line returns. Since inception, VWO has gained more than 115%. During that same time frame, GEMCX has risen only 72% (note that returns are based on monthly adjusted closing prices).

Key Takeaway: ETFs are cheaper, and more effective.

The Bottom Line

This is just one of many examples of how ETFs are often better than mutual funds. Not only are exchange-traded funds usually cheaper, but they are often more efficient than mutual funds. If we’ve managed to convince you, use our free Mutual Fund to ETF Converter Tool to find an alternative to your current mutual fund.

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Disclosure: No positions at time of writing.