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.