There comes a time in many conversations I have, where I can see the nervousness build. When I see that happen, I know exactly what is going on.
There is a question about an investment or strategy, but they are afraid to ask it. Maybe it’s out of fear of looking uninformed. Maybe it’s out of fear of the answer itself. Either way, I would like to tell you now, loud and clear:
PLEASE ASK ME!
I love answering your questions. It’s literally why I do what I do. I want to help people solve problems and put them on a solid financial path.
So, in this vein, let me answer a common question, you may be afraid to ask.
What differentiates Mutual Funds, Exchange Traded Funds (ETFs), and Hedge Funds?
A Mutual Fund is a company. That’s the best way to think about it. That company owns securities, such as stocks, bonds, etc. You buy into shares of that company when you purchase shares of the mutual fund. If you want to buy or sell shares, that is done at the close of the investment day. There are management fees to the management of the “company” and tax considerations to evaluate that can eat into your returns.
An ETF is a basket of securities meant to mimic the returns of a specific index. For example, maybe in your strategy, you want to own some of the S&P 500. Rather than go and figure out a way to buy all 500 stocks in that index, you could purchase an S&P 500 ETF. That ETF will attempt to mimic the price movement of the S&P 500, but you won’t own 500 stocks. ETFs are traded like stocks throughout the day. The expenses tend to be lower than mutual funds, but the fund is often not actively managed. Of course, it can be, but that does typically add to the fee.
Finally, a Hedge Fund is one you often hear about in the news that the ultra-wealthy invest in. Hedge Funds are always actively managed. The idea behind them is that they are trying to hedge against risk while capturing maximum upside. They often invest in things outside of stocks and bonds. Hedge Funds tend to come with a huge cost, which is why not everyone invests in them. Honestly, while exotic sounding, they are simply not necessary for the average investor to save for a successful retirement.
Ok, that was a lot of information. Obviously, there is a lot more to each of these, but hopefully, this helps answer some questions. If you have more regarding any of these or other investments – no matter how silly you think they may be – ask away. I would be happy to help.
Sincerely,
Cliff Cadle, CPFA, AIF