If an investor has a $100,000 portfolio, Ardrey said ETFs will probably work better—providing broad-based diversification and lower costs. As wealth grows, investors can start diversifying their investment strategy and expand into actively managed mutual funds or other financial products.
“It’s not to say that the ETFs go out the door, but this is where you can use things that are in a more actively managed structure,” Ardrey said. Some ETFs are also actively managed and can still be cost-effective.
“Often, I’ll use a combination of fund managers and ETFs to try to get the client increased yield but also good diversification,” he said.
Low fees don’t mean growth
However, Salgado said, an ETF can potentially harm an investor if market volatility scares them.
“Just because it comes with low cost doesn’t mean it’s going to grow in value,” Salgado said.
For instance, a young investor has a lot of years ahead of them to invest and the money isn’t needed in the short term, they could lean toward an equity ETF, Salgado said. But an older investor who wants to protect every dollar they’ve earned while maybe having more fulsome financial planning might opt for a mutual fund or find a more conservative approach, he added.
Read the fine print before investing
Ardrey said whichever way investors decide to go, they should first take the time and understand what exactly they’re investing in and the costs of each product. It can’t just be because they heard it was a good idea.
“One of the biggest differences between an ETF and a mutual fund is how they are traded,” he said.
