Why I’m moving my retirement savings from mutual funds to ETFs

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• When I first started investing over a decade ago, I put the bulk of my assets into mutual funds.
• Over time, my strategy has shifted from a focus on mutual funds to a focus on exchange-traded funds (ETFs).
• While ETFs and mutual funds are similar in most aspects, several key benefits make ETFs a better choice for the average investor.
• For one thing, ETFs offer more liquidity. Also, ETFs have lower fees than mutual funds and there are plenty of them to choose from.
• Start investing today with SoFi Active Invest »

Exchange-traded funds (ETFs) are a popular type of investment fund. When you buy shares of an ETF, your funds are combined with other investors’ cash to buy stocks, bonds, and other assets. If that sounds a lot like a mutual fund, it’s because this is how mutual funds work too. But there are some key differences between the two that investors should know about.

I have been investing since 2008, the year after I graduated from college. In my early years of investing, I put most of my long-term investment dollars into mutual funds. But for the last few years, I’ve been shifting that strategy to one focused primarily on ETFs. 

Here are four important reasons ETFs are a great investment choice and are becoming a growing share of my family’s portfolio.

ETFs offer immediate liquidity

Mutual funds have a long history. The first modern mutual fund in the United States was created in 1924. For nearly 100 years, investors have been combining their money to invest at scale. Until the 1970s, virtually all mutual funds were actively managed investment funds. In 1976, John Bogle at Vanguard made the then-unpopular decision to create the first index fund. But outside of how the investments were managed, the rules were pretty much the same.

All mutual fund trades take place once per day after the markets close. ETFs, on the other hand, trade throughout the day just like stocks. If you want to sell an investment in a hurry, you can click the sell button and have a trade execute almost instantly during market hours when you invest with ETFs. If you have mutual funds, you’re going to have to wait until the end of the day for your order to sell.

ETFs often have lower fees than mutual funds

Mutual funds can charge load fees, which are fees when you buy and sell fund shares. In addition, mutual funds charge an annual fee as a percentage of how much you have invested. The annual cost, known as an expense ratio, is often around 0.5% to 1% for actively managed funds, though they can sometimes be more than 2%.

According to Vanguard, the industry average mutual fund expense ratio is 0.63%. That’s brought down by lower-cost index mutual funds, which follow market indexes like the S&P 500.

Like stocks, you can trade ETFs with no commissions at most major brokerages. There are no load fees when buying or selling. There are still expense ratios, but they tend to be much lower than mutual funds.

According to Vanguard, the industry average expense ratio is 0.23%. That’s about a third of the average mutual fund. You probably wouldn’t pay three times more for a similar car or home appliance. Why would you pay three times more for similar investments? I know I wouldn’t.

There’s a growing selection of ETFs to choose from

When I started investing in 2008, there were about 8,000 mutual funds in the United States and just 700 ETFs. The number of mutual funds hasn’t changed much, but there are now more than 2,000 ETFs to choose from, according to Statista.

With more than double the number of ETFs since I got started in the markets, there’s now a fund for nearly any investment style, goal, or need. While there are still fewer ETFs than mutual funds, there’s enough selection that your needs, like mine, are likely covered.

You can use ETFs for nearly any investment goal

You can buy ETFs that follow virtually any index, commodity, precious metal, currency, asset allocation, and even alternatives.

There are ETFs that follow the market and ETFs that move opposite to the market. There are very low-risk ETFs and very high-risk ETFs. It doesn’t matter if you are an active trader or passive investor. In 2020 and beyond, you can certainly create the right portfolio of ETFs for your needs and not feel like you’re lacking because you don’t have mutual funds.