Exchange Traded Funds vs. Mutual Funds

Exchange-traded funds, or ETFs, are similar to mutual funds in their purpose, but not in their application.  Both instruments bundle together securities in order to offer investors diversified portfolios. Anywhere fromr 100, or even up to 3,000 different securities can make up a fund, yet, the two investment types have significant applications and are used by investors to, oftentimes, accomplish different goals.
 

ETFs trade throughout the trading day, like a stock, while mutual funds trade only at the end of the day.   If you call your financial advisor and tell them I want to buy "XYZ" at 1230pm, the price that the fund will be purchased at will be the 4pm price, or price at the end of the day (NAV).  Most ETFs track to a particular index and therefore have lower operating expenses than actively managed mutual funds. Thus, ETFs can improve your rate of return on investments because of the lack of internal fees. In addition, ETFs have no investment minimums or sales loads, unlike traditional mutual funds, which have both. However, most indexed mutual funds will not have sales loads.

There are several other differences in ETF's and Mutual Funds, such as, how they redeem shares and the tax implications that these events cause.  ETF's are also a relatively newer investment vehicle than Mutual Funds, which can be found in nearly every 401k or profit-sharing plan in the marketplace.

In the end, both serve a purpose and can help individual investors achieve their financial goals.  Neither is necessarily better than the other, but rather when used in the ideal type of situation can have a better application for you.

ETFs	Mutual Funds
Trade during trading day	Trade at closing NAV
Low operating expenses	Operating expenses vary
No investment minimums	Most have investment minimums
Tax-efficient	Less tax-efficient
No sales loads	May have sales load

How do 529's work and what are my options for college savings?

Saving money for college (yours or your children’s) is a good thing, even when financial times are tough. Uncle Sam backs up that college-investment philosophy with a variety of savings programs that contain built-in tax incentives. Consider the following:

• Section 529 plans: Qualified tuition programs covered under Section 529 of the Internal Revenue Code allow you to save money for future college expenses for a specific beneficiary (you, your child or someone else's). Your money goes into an account, that's custodialized at an investment company (for example, Franklin Templeton or American Funds to name a few).  To make a Section 529 plan work, you have to understand its requirements and follow them, for example:
  • You’re not allowed any federal income tax deduction for the amount of your Section 529 plan contribution.
    Depending on which state you live in (and if you use its plan), you may get a current state income tax deduction for part or all of your contribution each year.
  • Interest that you earn on the money in a Section 529 plan isn’t taxed until distributions are made to your designated beneficiary. And if you use these distributions to pay the qualified education expenses of a student at an eligible educational institution, accrued earnings generally aren’t taxed at all.
  • To get these tax benefits, the money must be used for qualified expenses (tuition, room and board, books, and so on) at qualified institutions.  I.E. not The School of Hard Knocks doesn't count.

 

 

529's have become the most prominent vehicle in the college savings landscape.  Other options include Coverdell accounts, UTMA's or UGMA's, and traditional banking/ savings accounts such as CD's, or money markets.  Yet, none of the aforementioned have the flexibility of investment options and powerful benefit of potential tax-free growth that 529's have.

529's, Coverdell's and UTMA/ UGMA's are offered through a variety of investment companies and financial institutions, and marketed through financial advisors.  In some instances, employees can participate in 529's as part of their employer benefits program, but this depends on the state they are in, and their employer's benefits package.

Welcome to the Points North Financial Blog

Welcome to the Points North Financial Blog!

The purpose of this blog is to inform and educate people about some of the everyday practices in the Financial Services and Investment Industry.  Far too often I run into people who not only do not understand why they are investing in a certain product or account, but where and what they are investing in.  It is my desire for people to get a greater understanding of these concepts through monthly entries into this blog.

Some of the topics I will cover will include-

* Alphabet Soup-  Decoding SEP's, 529's, IRA's, 401k's and Roth's.  What are the distinct advantages of these accounts.
* What is this?-  Explaining Annuities, Mutual Funds, Stocks, ETF's, Variable Insurance, Municipal Bonds and options.
* Fact or Fiction-  Making sense of myths and expectations, and how to find value in a landscape that can be very misleading.
* How to-  Easiest ways to save for specific expenses using tax advantaged accounts.


I look forward to writing this blog and sharing some insight.  The goal is to make ones life easier.  Thank you for reading!

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