Trading ETFs Instead Of Mutual Funds
An investment vehicle that has become popular of the last several years are exchange traded funds, also known as ETFs. These are similar to traditional mutual funds, but ETFs can have several advantages. Let’s use the example of natural gas ETF funds compared to oil mutual funds.
ETF Price compared to mutual fund net asset value
ETFs offer greater transparency to their holdings than mutual funds. Mutual funds typically report their holdings quarterly. This makes it difficult to see what exactly he or she is investing in. Frequently at the end of a quarter, some mutual fund tend to window dress their portfolio. This means they will buy some of the hotter or better performing stocks near their report date to show investors and possible investors they have winning stocks in their portfolio. Exchange traded funds have to disclose their holdings on a daily basis. Since ETFs try to replicate an underlying index, you can go to that indexes website to see its portfolio.
An interesting difference between exchange traded funds and mutual fund is the way they are priced and how you buy and sell them. Mutual funds can only be bought and sold at their net asset value (NAV) at the end of the trading day. You do not know the price you will receive until after the close. The disadvantage to this is if for example bad news comes out early in the trading day. If you would like to get out of the market at that point, you can’t. You can put your order in to sell, but you will only receive the closing price. With an ETF, you can buy and sell through out the day like individual stocks. Once again if a news item came out early in the trading day, with an ETF you can react immediately and jump in early as opposed to the end of the day. You can also place limit orders and stop order for an ETF. After entering an ETF, you can place your stop loss order in and leave it there. This way if there is an adverse move in the ETF price, your order is already in to get you out. No need to constantly monitor the market.
These are just a few things you consider when looking to trade natural gas mutual funds.
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