An exchange-traded fund (ETF) is a pooled investment vehicle that can contain a basket of securities, similar to a mutual fund. However, ETFs have real-time pricing and can be purchased and sold throughout market hours on an exchange, akin to individual stocks. Mutual funds are only priced once, after the market closes.
Tax liabilities can be a critical factor that investors should evaluate when determining which type of vehicle to invest in. In taxable accounts vs. tax-advantaged retirement accounts such as IRAs and 401K plans, investors will have to pay taxes on any capital gains their investments earn. ETFs can offer greater tax efficiency relative to a similar mutual fund because investors will not pay capital gains taxes unless they sell their ETF shares at a profit.
Mutual fund investors, on the other hand, could be subject to tax liabilities each year based on the actions of others within the fund, and not necessarily due to their own activities. For instance, if other investors in the mutual fund decide to exit the strategy, the fund may need to liquidate (sell) shares of the underlying securities in the fund in order to meet the withdrawal obligations. These transactions may result in realized capital gains that are taxable to ALL shareholders still within the fund, and not just the investors that have liquidated.
In short, ETF investors are only taxed based on their own actions.
ETFs are priced continuously throughout the day during market hours, while mutual funds are priced just once a day, at market close.
The advantage of continual pricing is that investors have greater control over the price they buy or sell their ETF shares at, and the timing of their trades. Transactions are processed at the time of order. This type of liquidity can provide a potential benefit for ETF investors during volatile market conditions.
For mutual fund investors who place a trade anytime during the day, they must wait until all orders are collected and processed at market close in order to determine the price they will receive.
However, when purchasing an ETF, you may pay a brokerage and/or commission fee for each trade, which will reduce returns.
ETFs generally have lower expense ratios when compared to their mutual fund counterparts. Expenses for an ETF are usually lower due to reduced amounts of administrative, management, and trading costs associated with the vehicle. For instance, since ETFs are traded on an exchange, the fund company is not involved with the trading transactions. In a mutual fund, the fund company is responsible for the trades; therefore, the operating costs may be higher.
Active ETFs will generally have a higher expense ratio than passive ETFs, simply because there is a cost to having the portfolio managed by an investment professional or team, as opposed to mirroring a benchmark like many passive ETFs do.
For the Cambiar Aggressive Value ETF (CAMX), an active ETF, the expense ratio is 0.59%. The comparable mutual fund (Cambiar Aggressive Value Fund) had an expense ratio of 1.00%.
It is always a good exercise to compare expense ratios of an ETF to a comparable mutual fund to ensure which is the cheapest option.
* Diversification does not ensure a profit or guarantee against a loss.
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Actively Managed ETF
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Active Mutual Fund
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| Trading | Trades throughout the day on a stock exchange. | Bought and sold once a day—at market close. |
| Pricing Control | Yes—ability to dictate what you are willing to pay for the ETF. | No—price is set at market close. Investor will receive the same price as others. |
| Holdings Transparency | Fully transparent ETFs—holdings available daily. | Available monthly with a 30-day lag. |
| Tax Efficiency | More efficient. Capital gains cannot be generated by other investors in the ETF. | Capital gains on your investment can be generated by other investors in the mutual fund. |
| Fees | Generally lower than comparable mutual fund. | Generally higher than comparable ETF. |
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Actively Managed ETF
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Active Mutual Fund
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| Risk | Usually less risky than buying individual securities. | Usually less risky than buying individual securities. |
| Diversification | Able to offer a variety of investment within the ETF. | Able to offer a variety of investment within the mutual fund. |
| Professionally Managed | Yes—managed by a portfolio manager or team of investment professionals. | Yes—managed by a portfolio manager or team of investment professionals. |
* Diversification does not protect against market loss.
Investing involves risk, including the possible loss of principal. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging Markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. The Fund may invest in derivatives, which are often more volatile than other investments and may magnify the Fund’s gains or losses. With short sales, you risk paying more for a security than you received from its sale. Short sales losses are potentially unlimited and the expenses involved with the shorting strategy may negatively impact the performance of the Fund. The Cambiar Aggressive Value ETF is a non-diversified fund. The Fund pursues a “value style” of investing. Value investing focuses on companies whose stock appears undervalued in light of factors such as the company’s earnings, book value, revenues or cash flow. If the Adviser’s assessment of market conditions, or a company’s value or prospects for meeting or exceeding earnings expectations is inaccurate, the Fund could suffer losses or produce poor performance relative to other funds or market benchmarks. The Fund may trade securities actively, which could increase its transaction costs (thereby lowering its performance) and could increase the amount of taxes you owe by generating short-term gains, which may be taxed at a higher rate. There is no guarantee that the Fund will meet its stated objectives.
To determine if a Fund is an appropriate investment for you, carefully consider the Fund’s investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Fund’s summary or statutory prospectus which can be obtained by clicking here or calling 1-866-777-8227. Please read it carefully before investing.
Cambiar Funds are distributed by SEI Investments Distribution Co., 1 Freedom Valley Dr. Oaks, PA 19456, which is not affiliated with the Advisor. Cambiar Funds are available to US investors only. Strategies included within the Separate Account section are not mutual funds and are not affiliated with SEI Investments Distribution Co.
Alpha – A measure of the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by beta. A positive Alpha figure indicates the portfolio has performed better than its beta would predict. In contrast, a negative Alpha indicates the portfolio has underperformed, given the expectations established by beta.