Exchange-traded funds are popular substitutes for traditional mutual funds. Whereas most traditional mutual funds are actively invested by managers, ETFs are typically "passive" portfolios that rarely change. Rather than trying to beat the performance of a particular market index, such as the S&P 500, the goal of an ETF is usually to replicate the value and movement of an index. If you want to switch out of a mutual fund, you can usually find an ETF with similar investment goals. Since the investments in an ETF don't often change, ETF expenses are usually lower than those of a traditional mutual fund.
Define the investment goal or pattern of your mutual fund. ETFs often have more narrow investment objectives than broad-based mutual funds. For example, if you own a typical growth mutual fund, the manager may invest in many different types of stocks. To replace that fund with an equivalent ETF, you must find a similarly broad-based ETF. You could also consider swapping your mutual fund into a number of different ETFs that together reflect an investment style similar to that of your mutual fund.
Create a list of available ETFs that match your investment goals. If you work with a financial advisory firm, it should be able to provide you with suitable options. Other sources of ETF lists include financial newspapers, such as the Wall Street Journal, or financial websites. Specialized sites, such as the ETF Database, provide free tools that allow you to identify ETFs with comparable alternatives to traditional mutual funds.
Evaluate performance. Just because you find an ETF that has the same investment goals as your mutual fund doesn't mean it's a better option. Compare the gains and losses of your fund with your potential new ETF to see how each performs in a variety of market conditions.
Compare costs. The costs of an ETF or a mutual fund can be a drag on long-term performance. All funds and ETFs cost money to operate, but many have significantly lower expenses than others. All other things being equal, you'll want to consider a lower-cost ETF over one with higher expenses. When comparing overall expenses, don't forget to include the costs of selling your mutual fund and buying an ETF. Some mutual funds may charge high exit fees that could reduce or eliminate the benefit of moving to an ETF.
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