Financial markets
Financial markets
Anton Kropotkin
Question 1:
a. Explain the main differences and similarities between each other.
The difference between mutual funds and ETFs is that mutual funds trade in the end of the day, while ETFs trade through a day, so they are more like stocks. When trading ETF’s you have an ability to place stock orders, which helps you to overcome risks which can occur when one them has fallen in the price or has unpredictable behaviour on the market. It’s also called a stop order. When we compare it to mutual funds, investors don’t have this ability to overcome the risks. If we compare both in trading, ETF’s are defiantly safer than mutual funds. Another major difference between them is that for a mutual fund your investment should be minimum of 3000 dollars as they wouldn’t accept lesser amount, while to invest in ETF you can buy one share of a company for 50 dollars. Also comparing them in expenses, mutual fund will have higher expense ratio than ETF’s. Another difference is that mutual funds are actively managed, while the ETF’s are not, as they follow the programmed index that is very specific
The similarities between mutual funds and ETF’s, they are both safer in investing than bonds and stocks. Because one fund can include hundreds of different stocks. “The biggest similarity between ETFs (exchange-traded funds) and mutual funds is that they both represent professionally managed collections, or "baskets," of individual stocks or bonds.” (investor.vanguard.com). If you are investor, both will offer investment options, one could have higher risks, another one lower, it depends on what you want to achieve from your investment.
b) Explain what are the main advantage and disadvantage of investing in mutual funds or ETFs
ETF’s
Advantages of ETF’s are that they have low costs, when buying one of the portfolios, the commission will be as low as 5 dollars, which is nothing, as the costs of buying single stock will be the same. One of the biggest advantage of investing in ETF’s is diversification, as they cover all major trading sectors and are mixed in one portfolio, again it depends on your desires from what you want to achieve, now days there are hundreds of ETF’s to choose from. Third advantage that was mentioned, is that you can enter with low investment, which starts at some ETF’s at 50 dollars. Fourth advantage is that they are traded on any time during a day, which gives flexibility to an investor. Last advantage is that investors have more control on incurring taxes as they are passively managed.
Disadvantages of investing in ETF’s are that they are passively managed and are following programmed index, it may not have the top stocks in the portfolio of ETF’s and normally they stay the same and don’t change the portfolio. “Also by owning the index, or ETF tracking the index, you may own more of expensive over priced stocks and less of the bargain under-priced or value stocks.” (arborinvestment).
Mutual Funds
Advantages of mutual funds are that they are controlled by professional managers, from who you can have an advice on your portfolio/investment. So the investor, doesn’t have to do a research where to invest money, its good option, especially if you don’t have any knowledge and experience. Second will be diversification, so the risks are spread, if one stock does bad, another one can go up, so you have less risks, usually one portfolio will consist of 50 to 200 stocks. Another one is that after getting dividends, they are being reinvested.
Disadvantages of investing in mutual funds are that your minimum investment will start from couple of thousands, so if you are planning to try it for first time, it may not be the right place. As the managers have control over your money, and if stocks will go down and you lose your money, the manager will be the one who is responsible for that. The third one will be that you have to pay management fees. And the last one will be that some of the mutual funds looks your investments for 5 to 7 years.
c) Explain the main difference between active and passive management
The first difference between passive and active management is a strategy. It’s different in the approach of how the investment is held through time in the portfolio. The aim of active management has a goal of getting the best out of the portfolio, which means its moderated all the time and adjusted to a situation on the market. While passive management is aimed on imitation of specific index.
Second one are returns. Active management is aimed on getting highest returns, while passive one makes small returns. Comparing in returns, passive one is safer one active one.
Third one are fees. Active management requires a lot of attention and making researches, which means the fees and expenses are high. In passive management there are no managers, so which means they have very low fees.
Another major difference is transparency. You can track your passive investment as it tracks an index, while in active they are not transparent, one of the reasons could be that they hide information from competitors.
Question 2
2. Go to https://www.morningstar.com
a. What information does provide the Morningstar Style Box®?
b. Morningstar assigns a Rating to each Mutual Fund. What are the criteria they use to assign this rating?
c. Use the information provided above (style box and ratings) to choose 5 different mutual funds/ETFs (5 funds/ETFs per each portfolio) to prepare 3 portfolios for 3 different types of investors:
- Aggressive
- Moderate
- Conservative
b. In half a page for each portfolio, explain:
· The rationale behind choosing the given funds/ETFs per each portfolio
· The criteria chosen to build each portfolio
c. Follow up the prices for all 3 portfolios for a week. Calculate the return for each portfolio at the end of the week. Explain your results.
References
https://www.thebalance.com/differences-between-mutual-funds-and-etfs-2466791
https://investor.vanguard.com/etf/etf-vs-mutual-fund#/layer1
http://www.arborinvestmentplanner.com/what-is-an-etf-advantages-disadvantages-newsletter/