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2022 EP0618 | Planning Matters Radio | ETFs vs Mutual Funds

Planning Matters Radio / Peter Richon
The Truth Network Radio
June 18, 2022 9:00 am

2022 EP0618 | Planning Matters Radio | ETFs vs Mutual Funds

Planning Matters Radio / Peter Richon

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June 18, 2022 9:00 am

You should never invest in something you don't understand, which is why @Peter with @richonplanning and @erinkennedy are breaking down the similarities and differences between Exchange Traded Funds or #ETFs and mutual funds.

  ETFs have become very popular recently, and experts predict global ETF assets will total more than $12 trillion by the end of 2023! But before investing in this growing trend, Peter recommends you weigh the pros and cons of each by walking through these questions: -How are they managed? -How are they traded? -What are the costs? -What about Tax Efficiency?   If you'd like Peter's help determining which investment strategy is right for you, please reach out for a complimentary consultation by calling (919) 300-5886 or by making an appointment at

Rob West and Steve Moore
Rob West and Steve Moore

Plan force planning matters when you get to see you today.

We are breaking down versus mutual fund and talking about is that caps are really gaining steam here.

They were first launched, and 93 in the US and it's predicted that global ETF assets well be over $12 trillion by the end of 2023 that started to be taught what media what's mutual fund and ETF's in exchange traded fund and it's kind of the newer evolution of mutual funds. The idea is that you get diversification within a single investment so I sort of liken this to going to the horse races at the track.

You can bet on one course winning the race. That's kind of like buying an individual stock mutual funds and ETF's kind of give the investor the ability to just make the bet that some of these horses are going to finish this race eventually and it's a much safer bet that's more likely to pay off because of the diversification that you have within that investment makes sense you really value educating our clients. The reason for doing this videos makes people feel empowered to invest in something that they understand and walk through a series of questions here.

The first question I want to break down between the two is how are they managed yet so mutual funds have a fund manager. They have a stated objective.

They have a prospectus that outlines how that particular mutual fund must be invested in its objective essentially and the fund manager is in charge of transacting equities inside of the fund to make sure that the fund on hole stays in line with its stated objective e.g. The Other Hand, Don't Necessarily Have That Fund Manager, nor That Expense of the Internal Management of the Equities and ETF Simply Tries to Buy the Entire Sector of the Market That It Is Aiming to Give the Investor Exposure to so There Are Number of Different Types, but What Ever Area of the Economy You Are Looking for Some Exposure to If You Think Healthcare or Energy or Commodities or Just a a Market Index in Particular Is a Good Place to Be Invested at the Moment There's an ETF or That Impact How Are They Traded so Mutual Funds Are Traded at the End of the Day. So during the Course of the Day, Their Value Does Not Change. It Is Priced at the End of the Day and That Is When You Can Buy or Sell or Trade. So If Some Event Happens at 11 O'clock in the Day and You Say Hey I Think It's a Good Time to Get Out Of This Mutual Fund You Can Place That Order.

But You're Not Going to Sell out Actually until the End of the Day Wears ETF's Are Active during the Course of the Day They Can Be Traded Minute to Minute so They Are 00 Little Bit More Tactical in the Way That They Can Be Traded, Not That You Should Be Attempting to Day Trade Them or Sell Them Minute by Minute, but If That Event Comes up, They They Are a Little Bit More Liquid.

That Way I Just Want to Show This Venn Diagram, Which I Think Is Kind of Interesting Because It Shows the Similarities and Differences That the Two Have As We Move through These Questions Again, and I Think You Had on This Essentially, What Are the Costs. One of Them Has More of a Human Element Right That Might Be a Little Bit More Expensive Exactly yet E Mutual Funds Tend to Have an Average What's Called an Internal Expense Ratio of about 1% and That's One of Those Hidden Costs in the Layers of the Onion of What You Are Paying for Your Money Management. That's Often One of Those Layers That Is beneath the Surface That People Don't Really See They Are Really Aware of. They May Be Aware of What They Are Paying Their Advisor or or Some Account Set up Fee but A Lot Of Times within That Account. There Are Mutual Funds That Also Have Internal Costs and Expenses, Those Internal Expense Ratios I Have Seen Them As Low As One Half of a Percent up to 2% Internally and As Opposed to That ETF's Generally Are Much Lower in Cost Because They Don't Have That Human Element and the the Active Buying, Selling, Trading, Exchanging of Securities with in Them As Much. They Can Be Much Lower Cost Than I've Seen.

These Range from like .25% down to As Low As 1/10 of 1% or or Less. So As Far As Cost Efficiency ETF's. I Think When They Are. That's Why They Are Sort of. This Newer Evolution and There Are Some Other Advantages As Well. So the Next Question Is What about Tax Efficiency.

I Feel like If I Had a Bingo Card with You That Would Be My Center Square That Is so Central to You and Your Philosophy When I Speak of Other Advantages. This Is the Big One so It Does Not Matter As Much within Qualified Accounts Because As We Explained on the Previous Video inside of an IRA or 401(k), Buying, Selling, Trading in Transacting Does Not Generate Any Taxable Event. But for After-Tax Cash That You've Gone and Invested in a Nonqualified Investment or Brokerage Account. This One Matters A Lot, Mutual Funds, without Getting Too Political Are like Socialism in Investment Form and I Say That in the Mantra of Socialism Is from All According to Their Ability to All According to Their Need and the Way That Mutual Funds Work If You and Iron Both Invested in the Mutual Fund and Then It Made or Lost Money and I Wanted My Cash out, but You Wanted to Stay Invested Well the Fact That I Wanted My Cash out Would Create an Internal Transaction That You Ultimately Would Also Be Responsible for the Tax Implications of so What Happened in 2008. If We Flashback Is That Mutual Funds across the Board Actually Lost Substantial Value Investors Probably Remember That Time and in Non-Qualified Accounts. A Lot Of Those Same People That Lost Substantial Dollar Value inside of Their Mutual Funds Ended up Getting a Tax Bill for That That They Owe Taxes on When They Filed Their 2008 Returns. And That's Because the Managers of These Funds When Other People Went to Cash out. They Sold the Equities That Were at the Highest Gain Possible Which Created a a Transaction That Was Taxable inside of the Mutual Fund That Is Passed on to Its Investors and so Tax Efficiency Wise ETF's.

Again, Kind of the Newer Evolution of Being Able to Diversify within One Investment Purchase Don't Have That Tax Inefficiency Quality You're Only Going to Have a Tax Event.

If You Sell at a Profit. You're Not Sharing That Responsibility with All of the Other Investors There Invested in That Mutual Fund. So How Do I Know Them, Which Is Right for Me. Well II Think That You've Got to Evaluate That on What You Are Looking for in and How Much Oversight You Want.

If You're Fairly Confident in Your Own Investment or Your Trusting an Advisor Who Likes to Use ETF's. There's Really Not a Right or Wrong. Universal Answer. Both Can Be Effective. I Utilize Both My Client Portfolios. However, I Do like the Efficiency Aspect of the ETF's and I Think That They Do Offer a a Little Cleaner Understanding of What You're Actually Invested in. I Think in Either One of These, the Waters Could Be a Little Murky in Understanding What All Your Mutual Fund Is Actually Invested in That's in That 100 Page Prospectus That Nobody Reads and with ETF's. Also What You Are Invested in May Not Be Absolutely Clear and Identifiable Right from the Gate but If You Say Hey I Would like a Healthcare ETF. I Would like an Energy Sector or Commodities or or a Tech Sector ETF or I Would Just like an ETF That Tracks the Progress of a Specific Market Index. You Can Therefore Have Some Clarity on What You Are Invested in Because It Owns the Entire Sector but I'm Glad You Brought That up Because I Do Want to Talk about Some ETF Themes That Are Going to Be Popular in This Year and Coming up and One of Those Is Mitigating Inflation. Yeah There Are a Couple out There for That TIPS Is Is a Famous One Treasury Inflation Protected Securities, and This Is Not a Recommendation by Any Means of Any of These, but There Are Certain ETF's That Track Certain Factors of the Economy Such As Inflation and TIP Is One of Those. However, You Do Need to Understand Getting in That It Tracks the Change in Inflation. So Even the Were High Inflation Right Now. If That Number Begins to Come under Control. The Treasury Inflation Protected Security Tracking ETF Tip Could Lose Value End and These Are Securities Were Talking about. So That's a Statement That Can Really Be Said to Be Across-The-Board Something Else of That Coin ETF Thing We Hear about the Kind of the Time.

Yeah, and That's Lost a Good Bit of Value This Year As Well.

There Are All These Kind of One off Areas That You Could Get into Aerospace Defense. Few Others I've Named a Tech Healthcare Energy Commodities ETF's of Perform Fantastically. This Year, but the Market Is Cyclical Right and so What Has Performed Very Well This Year May Well Be Towards the Bottom of What's Performing Well Next Year.

That's Why Diversification Is Important, but Again ETF's Focus on Diversification. So If You've Got A Few of Them in Different Sectors. Not Only Do You Own Those Different Sectors but You Own Multiple Companies with in Each Sector and That's Also Important Because the Retail Sector Could Be Very Healthy, but If JCPenney's or Macy's Doesn't Do a Good Job with Keeping up with the Online Nature of How the Retail Sector Works That Specific Company May Not Do Very Well Where the Retail Sector in General Is Still Doing Very Very Well and That's the Beauty of the ETF's Is That You Just Invest in All of the Companies in That Space, Across-The-Board. Another Theme Would Be ESG ETF's. We Hear That Is Environmental, Social and and Government Governments. This Is One That Is for the Socially Responsible Minded and Were Hearing A Lot about These Because They Are Really Becoming Very, Very Prevalent and I Think That on a Surface Level. It Sounds Super Attractive, but beneath the Surface of What These Things Are and How They Operate.

There Is a Lot of Discussion and Opposing Viewpoints to Our These Truly a Good Thing If We Are Being Told or Mandated at a Very High Level at an Institutional Level at a Governance Level at at a Banking or an Insurance Level. How We Must Be Invested in and If These Things Are Really Working in the Benefit of the Average Investor or If They Are Somehow Pointing Us in a Direction That That on the Surface May Seem Appealing, but Dig beneath the Surface and We May Actually Find We Are Morally Opposed to You Know II Can't Say Whether or Not That Is True across the Board, but You're Going to Hear A Lot about ESG Investing. I Think for Quite Some Time to Come, and You Got Away the Benefits and Disadvantages and and What It Really Means for Your Individual Specific Goals and Objectives and Lastingly Wanted to Touch on What ETF's and 401(k)'s. Yeah That's Also Becoming a Much More Commonplace Thing Again Because of the Cost and the Efficiency I Think That More and More Employers and Plan Sponsors Are Understanding Their Role, Their Duty, Their Responsibility to the Employees That Are Participating in 401(k) Plans. Technically Speaking, the Employer and the Institution Is a Fiduciary Which Means They're Supposed to Offer You the Best Options That Are in Your Best Interest, and If They Are Offering You an Option That Has a 1 1/2% Internal Expense Ratio and There Is an Option Available That Is Less Than One Half of 1% That Has Basically the Same Object Objectives and Investment Results and Returns Then It's Kind of Their Duty and Responsibility to All for You That Less Expensive Option. There Are A Lot Of Other Factors inside the 401(k) That That Are Similar. The Ability for the In-Service Distribution Was Another One Where 401(k) Sort of Held People's Money Captive and As They Neared Retirement They Weren't Able to Escape or Choose Other Options or Control Their Own Tax Destiny. More and More Companies Realize, Hey, We Don't Want to Take the Responsibility of Holding Our Employees Money Captive. So Let's Give Them the Option and the out That They Can Take Their Money out at 59 1/2 and Begin to Make Their Own Choices with Their Money and Escape Some of the Responsibility That We Technically Have for Their Financial Well-Being. This Was Incredibly Helpful and Peer. I Know That You Are an Expert on This Because This Is Also Part of the Absolutely Understanding Your Investment Options Thank You Erin. I Wrote Several Chapters about the Different Options That You Have Everything from Why Do I Need a Different Checking, Savings, Money Market or CD, You Know, Why Are There for Different Kinds of Accounts at Banks to Stocks, Bonds and Mutual Funds, ETF's Gold Life Insurance and Annuities. What's the Difference between Tax Deferred Versus Roth or Tax-Free Versus Nonqualified. All of These Different Options and to Be Brutally Honest, It's Probably the Cure for Insomnia, but If You Want to Have a Conversation and Understanding about Maybe Mutual Funds Verse ETF You Turn to Those Chapters Read 5 to 10 Pages and You'll Be Able to to Get a Working Knowledge and Understanding to Have a Pretty Informed Conversation and by the Way, You Can Go to Our Website Rich on and You Can Request and Download the ECopy of the Book for Free and Will Will Reach out and Be in Touch to See If You like a Physical Copy of Understanding Your Investment Options Are the Most Boring Book You'll Read This Year. I Scratch the Boring out and Then I Put Important.

They Are Chock Line Written above It Is I Am One of Those People Who Learn so Much More and I Can Actually Sit down with the Words in Front of Me so I Think That Is Incredibly Helpful. Such a Great Resource for Anybody Who's Interested in You Said Which I'm or Some Planning Phone Number and Email 919-300-5886 to Give Us a Call. Email Peter it right on same as the website rich on

I think you always pleasure. Thank you for planning matters radio the content of this radio shows were provided for informational is not a solicitation or recommendation of any investment strategy you were encouraging investment tax or legal advice from an independent professional advisor. Any investment and/or investment strategies mentioned involve risk and possible loss of principal binary services offered through virtual capital management. The registered investment advisor. Fiduciary duty extends only to investment advisory advice but does not extend to other activities such as insurance or broker-dealer services advisory clients are charged a quarterly fever as a product of a commission which may result in a conflict of interest regarding compensation

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