hey there Tiffany Thomas with the wealthy Tiffany dot com and in today's the
video I'm going to talk about mutual funds and Dex funds and ETFs so you can
have a better understanding of the differences and similarities between
those three types of investments and before we dive in if you're ready for
financial freedom comment freedom below in the comments and don't forget to hit
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to get notified when I post new videos and if you guys are serious about
becoming financially free sooner than later click the link below this video in
the description and I can help you do that okay so let's dive in and talk
about mutual funds index funds and ETFs because there's a lot of confusion
around these items and they kind of get interchanged when people are talking
about them so I just want to give you a quick basic overview I have some
differences and similarities between these three investment types that you
can do in the stock market so let's talk about mutual funds for a second there so
ok you have mutual funds and there are two types of mutual funds there are
actively managed funds so actively managed
and then the second type of mutual fund is an index fund which is not actively
managed okay so when people are talking about investing in mutual funds they're
sometimes not clear on on what they're talking about whether it's an actively
managed mutual fund or if it's an index fund so let's just clarify an actively
managed fund is when it's actively being managed so someone is in charge of this
fund and they are deciding what stocks to put in and if those stocks start you
know dipping down then they decide to take out some of those and put in some
different ones and so they're constantly changing that mutual fund that actively
managed fund and it's usually more expensive to invest and actively managed
funds they have a higher expense ratio and both of these types of funds have
expense ratios and when you are picking your investments you want to make sure
that you are paying the lowest amount possible in fees so you're going to have
an expense ratio with actively managed funds and with index funds and and the
expense ratios for actively managed funds are higher than an index fund
because they're actively manages managed someone is deciding what stocks to pull
in and out and when to replace them and with an index fund that is tracking
something else so it's not actively managed it's just following an index and
let me give you an example so there is a Vanguard total stock market index fund
and that fund follows the total stock market I know that's kind of a long
title for it but it makes sense because it's an index fund that is tracking the
total stock market the u.s. total stock market
and so when you are looking to invest I actually really like investing in
index funds because they have that lower expense ratio and the higher they
expense ratio the more money is that's going to be taken out of your
investments and you won't be able to grow that money as much over time so if
you have a lower expense ratio like with an index fund you're actually making
more money because essentially the actively managed funds there's been a
lot of studies done and they actually don't have a higher return than an index
fund so that's that's why I like index funds they have a lower expense ratio
and they still get a really good return for you so when you are talking about
mutual funds and someone is you know telling you about them make sure and ask
ok is it an actively managed mutual fund or is it an index fund that you're
talking about is it tracking something else
so hopefully that that kind of helps a little bit and so an index fund is just
tracking something else so it's going to cost less to invest in that because
there's not someone actively managing that fund like with an actively managed
fund so you want to pay attention to those expense ratios and like I had
talked about before that Vanguard total stock market index fund has a really low
expense ratio it's point zero four percent so that's that's super low
that's a super good expense ratio and honestly from my experience I've seen in
typical 401ks when you have different funds to choose
from they're closer to one percent expense ratio which may not sound like a
lot but that is that's a huge amount when you think about your investments
that are going to you know start at thousands of dollars and go up to
hundreds of thousands of dollars and even millions when you take 1% of that
away that's a significant amount of money so you really want to make sure
you're investing in items and funds that have really low
expense ratios okay and then let's talk about ETFs and make sure you can see
this ETF our exchange-traded funds and they they're a little different from a
mutual fund but they act kind of like an index fund because they're still
tracking something else they're not actively managed and so it is another
type of fund but it's an exchange-traded fund an ETF and it's tracking something
else so there is an ETF that is the Vanguard
total stock market ETF so that is tracking the total US stock market and
it's really easy to invest in ETFs because they don't have a minimum amount
that you have to invest it's just the price of the ETF so let me explain what
I mean when you're purchasing ATF's it's just going to be the price of the ETF
itself and with index funds or they set a minimum amount that you have to invest
in order to invest in that fund and the example that I used before the total
stock market index fund the Vanguard total stock market index fund that has a
minimum amount of $3,000 to invest so
minimum to invest
is $3,000 and not all index funds are are that high and some are actually
higher than this and but some of them could be $1,000 or $2,000 or you know
$3,000 or even up to $10,000 depending on your fund and but um you want to keep
that in mind when you are you know deciding what you want to invest in and
if you don't quite have that $3,000 and then maybe you want to start with the
ETF and invest in the ETF and the example that I gave the Vanguard total
stock market ETF and it's priced at about 143 143 dollars right now so
that's quite a significant difference right 143 compared to the 3,000 so ETFs
are easier to get started and if you don't have quite as much money to begin
investing if you only have you know a couple hundred dollars versus a few
thousand dollars and then you can start investing in ETFs and ETFs kind of act
like a stock in the fact that you can purchase the ETF throughout the entire
stock trading hours that the stock trading day hours and you can choose to
purchase the ETF and let's say at noon or something for whatever price it's
showing currently at the ETF on the ETF and so if it's showing you know 144
dollars at noon you can go ahead and purchase it for 144 dollars and you
immediately have purchased that ETF and with an index fund you have to wait
until the end of the day until the close of the trading hours of that day and
whatever the price is for that index fund is what you'll pay and so it's it
doesn't act like a stock in the sense that it's you know that price fluctuates
throughout this day and you can purchase at any time during these stock trading
hours and you have to wait until the index son gets priced at the end of the
end of the day and that's the price that you'll pay so you you
actually purchasing it at the end of the day even if you place your order at the
beginning of the day and so that is another difference and that you want to
keep in mind when you are deciding whether or not to invest in an index
fund or an ETF and also you know if you want to purchase you know more than one
share maybe you have a thousand dollars for you dot three thousand dollars then
you can definitely purchase more than one share of the ETF at a time and you
know you can decide how much you want to to invest at that time and purchase
multiple shares of the ETF and you can also do that with the index fund so if
you you know have more than three thousand dollars to invest and but you
have at least about three thousand dollars then you can invest more money
in an index fund and but you just have to have that initial three thousand
dollars to start investing that index fund and also with an ETF you also have
a an expense ratio so you want to make sure that the expense ratio is low on
your ETF as well as if you were going to invest an index fund and the example
that I've been using the Vanguard total stock market ETF is 0.04 percent so it's
the exact same as the index fund of the Vanguard total stock market index fund
so the super low ratio but you want to pay attention to that when you're
deciding on which ETF to invest in because you want to keep that expense
ratio as low as possible and when you are purchasing ATS there will be a
commission fee or a commission charge most of the time depends on who you are
investing with but for example if you were investing with Vanguard they charge
a seven dollar Commission fee so since an ETF is similar to a stock you're
going to be paying that each time you buy and sell your ETF so
you want to keep that in mind when you are looking to invest in an ETF instead
of an index fund and there's if you're investing at Vanguard and purchasing a
Vanguard index fund there's no Commission fee and there's no one-time
fee to invest in an index fund but there is with an ETF so that's another
difference that you want to keep in mind so ETFs are kind of like when you're
buying stocks you're going to pay that Commission fee and I actually buy stocks
through my ally account li invest and they charge $4.95 each time i buy a
stock or sell a stock so you want to keep that in mind when you're looking at
investing in ETFs and then another thing to keep in mind if your etf has a
dividend so if they're paying you a little bit of money and for investing in
the ETF then you want to if you want to reinvest that dividend and then most
likely you'll have to pay that Commission fee in order to reinvest that
dividend into your into the same ETF and so hopefully that makes sense and if you
you'll just look at the ETF and it will tell you whether or not they give you
dividends whether they pay you out either quarterly or yearly and if they
do and you want to reinvest that dividend so it's just a really small
percentage of what you have invested and then you most likely will need to pay
that commission fee and in order to reinvest that dividend so that's kind of
an embedded vantage the index funds have over ETFs and they'll automatically
reinvest your dividends for you without charging any sort of fee at all okay and
there are a few tax differences that I want to point out and so if you are
investing in a tax advantage to count then you don't have to worry about this
so for example if you are investing in your 401 K or an IRA and then you don't
actually have to worry about this right now but if you have it
just in a brokerage account and then I just want you to pay attention to this
so when you're investing in index funds and ETFs they hardly switch out these
stocks inside of those index funds or ETFs and so you're not going to be
paying capital gains tax taxes and that much with index funds and ETFs but
actively managed funds since they are actively managed you will see a lot more
stocks coming in and out of these actively managed funds so you will be
paying more in capital gains tax and so just pay attention to that and I'm not
gonna go into great detail about this but I just want you to be aware and that
the actively managed funds you will be paying more in taxes because things are
going to be switched up a lot more than in index funds or ETFs and they don't
trade out their stocks as much so you're not going to have that capital gains tax
that you'll have to report and pay taxes on for that year so to kind of recap
what should you be investing in an index fund or an actively managed fund or an
ETF and I would actually stay away from actively managed funds they have that
higher expense ratio that we talked about and you'll be paying more in
capital gains tax because of how much they switch around things and that fund
and that mutual fund and you're not getting a higher return by investing in
that actively managed fund you're just not and you can do research on the
internet and there's been a lot of studies done about this so I would
recommend active or index funds or ETFs for investing and you guys I don't want
you to get too hung up like if you think Oh index funds are so much better I need
to wait until I have my three thousand dollars to invest my money and I
wouldn't I wouldn't go that route I would get your money invested as soon as
possible so if you only have a few hundred dollars
would go with the ETF and get your money invested get it working for you sooner
than later because the earlier you start investing the more money you can make
over the long term so I would get started with an ETF and pay that
Commission fee $5 up to maybe $10 I definitely wouldn't pay more than $10
but I would yeah I would just get started and you know get your money
working for you and if you do have the 3000 then I would stick with an index
fund just because you don't have that commission fee that you're paying and
usually it's going to be a lower expense ratio no Vanguard the example that I
gave they have the exact same expense ratio but if you're comparing I know
there's a lot of different funds you can invest in and usually you'll see ETFs
have a higher expense ratio that an index fund so you really want to watch
that you want to pay attention to your expense ratios but if you do have that
3,000 to get started and then yeah I would go with the index fund and you
know if you only have a few hundred coming in to invest you know every month
or something then go ahead and invest in the ETF and if you want to switch that
over later to an index fund you can always do that or you can honestly leave
it in your ETF and because the way the way that I teach is to invest for the
long term and not worry so much about the short term and if that's what you're
doing then you're not going to be paying a lot of Commission fees because you're
just buying that one time and you're leaving it in there for a long time and
then you know once you've bought like 200 shares of the ETF or something you
can cash that all out and just pay the Commission fee once so you're not paying
for each share of the ETF you're just paying for that transaction so if you're
buying more than one share at a time of the ETF so if you're buying 10 shares of
the ETF at once you're only going to pay the five dollar charge once and then
when you sell it if you cash out 200 shares then you're only paying five
dollars so it's not if you're not paying for
each share so yeah hopefully this kind of gives you a good idea on mutual funds
actively managed funds and excellent ETFs and you can kind of you know move
forward from there and get started investing and start your money working
for you so you can become financially free sooner than later and if you guys
have more questions please post them below and if you have other ideas that
you want me to create content for create videos for please post that in the
comments below I would love to know that and love to create content for you guys
and this was actually a suggestion that came from someone so I was happy to make
this video and if you guys found this video helpful please like it and share
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really serious about becoming financially free sooner than later then
click the link below this video in the description and I can help you do that
and I will see you guys in the next video thanks