Investing

A good investor, young or old, values diversification – buying several different types of investments to avoid “unique risk.” This is particularly important to grandma as an old retail investor, who would want low-risk investments with a shorter time horizon. Thus, grandma should change her investments in Magellan to ETFs, especially in light ETFs’ advantageous cost structure and Fidelity’s history.

A mutual fund takes small investors’ money and pools with other investors to buy stocks or bonds in many companies. ETFs work in similar ways but instead of being actively managed like MFs, they track a particular stock market. A trustee will buy all the stocks in the index and are traded on the exchange. Though they sound similar, subtle differences give way to key reasons that make ETFs a better investment. For one, without a high-salary fund manager, ETF’s have low ownership costs and transparent expenses. In addition, there are no minimum investments, ideal for retail investors who may not have the thousands of dollars to entry that mutual funds require. ETF’s have more liquidity, meaning you can buy and sell multiple times a day with immediate result, allowing ETFs to be more responsive to market changes. Finally, ETFs are also more tax-friendly because you pay capital gains tax when you sell your shares whereas mutual fund holders are at the mercy of wondering whether their mutual fund will declare capital gains distribution or not.

However, ETFs are not without risks and limitations. Because ETFs are based on an index, they will never “beat the market,” and can miss “winners”; easy diversification through index means that grandma will miss out on the stock-specific gains. Furthermore, because ETFs are index specific, some are more volatile and riskier than others. For instance, since grandma’s goal is stability, she should not invest in a tech ETF. However, there are still risks associated with ETFs that mirror the makeup of already established indexes...