Badass vs Dumbass
Master your Financial Kung Fu to be one and not the other.
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Go to Sifu’s Notebook for 9 Proven Reasons Low-Fee ETFs Are Better Than Managed Mutual Funds
Primer: Who are Sifu & Ronin
Episode 36: Ronin is Mad as Hell!
Ronin: Sifu! I’m mad as hell! I can’t believe I’ve been paying almost 2% fees to invest in my mutual funds. Last year, some of those funds even lost money when the overall market was up, so talk about lose-lose. I’m such a fucking loser!
Sifu: Ah, Ronin. Anger can be a powerful motivator so let’s channel that energy against those high fees. It seems that you’ve been lured by those ubiquitous ads that promote managed mutual funds. Let’s discuss why you should go with low-fee ETFs instead.
Ronin: But Sifu, don’t you “get what you pay for”?
Sifu: Ha! Not always, and definitely not when it comes to funds.
Ronin: Whuuut?!
1. Lower Fees
Sifu: Low-fee ETFs save you money. While managed mutual funds can charge 1% to 2%, ETFs often charge as little as 0.03%.
Ronin: Yowza! What a massive difference! I’ve been throwing my money at this idjut fund manager who thinks he’s the next Warren Buffett. Spoiler alert – he’s not!
Sifu: Remember, Ronin, every dollar you save on fees is a dollar that can grow.
Ronin: Or a dollar I can use to buy snacks! Priorities, my man!
2. Compounding Effect
Sifu: The lower fees lead to more money for compounding. A small percentage difference can turn into a big stack of greenbacks over time.
Ronin: Right, boss! And if I throw in a few extra bucks, I might end up with enough to retire early. Or at least afford a lifetime supply of pizza!
3. Transparency
Sifu: ETFs also offer transparency. You can see what you own daily. With mutual funds, you only see the holdings quarterly, which is like only checking your fridge every three months—who knows what you’ll find?
Ronin: Check – been there, done that! I’ve created accidental science experiments that could be classified as WMD’s!
Sifu: Holy serendipity, Thanos! A military contract could be waiting for you at the Department of Defence. You never know!
Ronin: Def a possibility! Hahaha!
4. Tax Efficiency
Sifu: Low-fee ETFs are also more tax-efficient. With ETFs, you often avoid unnecessary capital gains taxes. You want your investments to grow without the taxman looming over you like a dark cloud.
Ronin: So, it’s like a tax ninja! Silent but deadly … wait, that’s farts! Hee-hee. Unlike mutual funds, which are like that friend who keeps reminding you about every bad decision you’ve ever made!
Photo by Kristina Flour on Unsplash
5. Better Performance (On Average)
Sifu: Studies show that low-fee ETFs outperform most managed mutual funds over time. Statistically, many active managers fail to beat their benchmarks.
Ronin: So “smart” mutual fund manager could be an oxymoron! Talk about “all hype, but no substance”!
6. Flexibility
Sifu: ETFs trade like stocks, allowing you to buy and sell throughout the day. Flexibility allows you to respond quickly to market changes. Back in my day, we had to wait till the end of the day to see what happened to our funds.
Ronin: Yeah, today, us kids have it great, don’t we? We can see instantly that we’re still broke!
7. Diversification
Sifu: With ETFs, you gain instant diversification across various assets. It reduces risk and increases the chances of better returns.
Ronin: Wait, you mean I can spread my eggs across different baskets instead of putting them all in one and watching it get kicked over by Drunk Gumby? This changes everything!
8. No Manager Risk
Sifu: Another benefit is that ETFs have no risk of a manager making poor decisions or leaving the fund. With ETFs, you can rest easy knowing your investments aren’t subject to someone’s whim.
Ronin: Well, my clown manager wasn’t Buffet or Munger, so I’m happy to ditch them now anyways!
9. Lower Minimum Investment
Sifu: Lastly, ETFs often have lower minimum investments compared to mutual funds. It makes investing accessible for everyone.
Ronin: Perfect! Now I can invest my lunch money and stay on my boiled egg diet!
Photo by Krisztina Papp on Unsplash
Sifu: Well, once you switch over to low-fee ETF’s, lunch is def on you. Why not splurge and go for something that doesn’t smell like a WMD?
Ronin: Doh!
Sifu’s Notebook
9 Proven Reasons Low-Fee ETFs Are Better Than Managed Mutual Funds
Investing is a crucial step on the path to financial independence, and choosing the right investment vehicle can make all the difference in the long run. For many investors, the choice between low-fee exchange-traded funds (ETFs) and actively managed mutual funds comes down to fees, performance, and flexibility. Below, we’ll explore the 9 top reasons why low-fee ETFs are often a better option compared to managed mutual funds.
1. Lower Fees
The most obvious advantage of low-fee ETFs is right there in the name: lower fees. Many ETFs come with expense ratios as low as 0.03% to 0.10%, while managed mutual funds typically charge between 1% and 2%. These fees may seem small, but over time, they can take a huge bite out of your investment returns. With ETFs, more of your money stays invested, working for you instead of enriching fund managers.
2. Compounding Effect
Low fees don’t just save you a little bit of money each year; they increase your ability to compound returns. Over time, the difference between a 1% annual fee and a 0.05% fee becomes dramatic. A $100,000 investment that earns 7% annually will grow to $761,000 in 30 years with a 0.05% fee, compared to only $574,000 with a 1% fee. That’s a big gap.
3. Transparency
ETFs are generally more transparent than mutual funds. ETFs disclose their holdings daily, so you always know exactly what you’re investing in. On the other hand, mutual funds usually disclose their holdings quarterly, leaving investors somewhat in the dark about the fund’s current strategy.
4. Tax Efficiency
ETFs tend to be more tax-efficient than mutual funds. Because of how ETFs are structured, investors can often avoid triggering capital gains taxes until they sell their shares. In contrast, mutual funds may pass on capital gains taxes to shareholders whenever the manager buys or sells assets within the fund, even if you haven’t sold your shares.
5. Better Performance (On Average)
Though some managed mutual funds may outperform the market in the short term, studies consistently show that over the long haul, the majority of actively managed funds fail to beat their benchmarks. Low-fee ETFs, especially those tracking broad market indexes, tend to deliver more reliable returns over time without the risk of human error or poor market timing.
6. Flexibility
ETFs trade like stocks, meaning you can buy or sell them throughout the day. Mutual funds, however, are only priced and traded at the end of the trading day. This flexibility gives ETF investors the ability to react quickly to market changes or investment opportunities.
7. Diversification
Many ETFs are designed to track broad market indices like the S&P 500 or specific sectors, providing instant diversification across hundreds or even thousands of stocks or bonds. While mutual funds can also offer diversification, actively managed funds may concentrate too heavily in a few assets, increasing your exposure to risk.
8. No Manager Risk
Managed mutual funds come with the risk that the fund’s manager may make poor decisions, underperform, or even leave the fund altogether. With ETFs, you eliminate the need for an individual manager, reducing the risk of human error and personal biases affecting your returns.
9. Lower Minimum Investment
ETFs often have much lower minimum investment requirements compared to mutual funds. Some mutual funds require a minimum investment of $1,000 or more, while you can start investing in ETFs with the cost of just one share, making them more accessible to beginner investors.
