3 ETFs to Buy Instead of Popular Mutual Funds

ETFs to buy - 3 ETFs to Buy Instead of Popular Mutual Funds

Source: Shutterstock

There’s nothing particularly wrong with mutual funds. The investing structure has been a tried-and-true portfolio element for decades and has allowed plenty of individual investors to grow their wealth, gain diversification benefits and save for the future. And there are certainly plenty of good mutual funds out there. But these days, there is something better — exchange-traded funds.

So, there is a real reason why exchange-traded funds have taken the world by storm. Featuring rock-bottom fees, similar diversification benefits and even some hefty tax savings, low-cost ETFs are simply a better choice for many investors. And now with the elimination of trading fees at many major brokerages, dollar-cost averaging into low-cost ETFs is even easier.

To that end, investors in some popular mutual funds could be better suited making the switch into ETFs. For investors in tax-deferred or tax-free accounts, the switch is easy. For investors in taxable accounts, you need to weigh the potential hit from the switch. However, in spite of that, the longer-term picture could justify selling your mutual funds and buying a low-cost ETF.

With that, here are some of the most popular and common mutual funds held by investors and great ETFs to replace them with.

SPDR DoubleLine Total Return Tactical ETF (TOTL)

Replaces: PIMCO Total Return (PTTRX)

Expense Ratio: 0.65%, or $65 on a $10,000 investment.

For investors looking at low-cost ETFs, switching out one former bond king for another may be a good idea. When Bill Gross was at the helm of the PIMCO Total Return (MUTF:PTTRX), the go-anywhere bond fund was one of the largest in the world, returns were great and the mutual fund was found in nearly every 401k plan. However, since Gross left, PTTRX has begun to sputter. There’s been a few management changes and assets have bled lower. These days, PTTRX is a shell of its former self.

And that’s why the SPDR DoubleLine Total Return Tactical ETF (NYSEARCA:TOTL) is a wonderful replacement.

TOTL is run by new bond king Jeff Gundlach. And like PTTRX, TOTL is considered a multi-sector bond fund. Gundlach is able to buy mortgage-backed securities, Treasury debt, bank loans, commercial mortgage securities, investment-grade corporate bonds and even emerging market debt. The beauty is that TOTL has a svelte $3.4 billion in assets compared to PTTRX’s nearly $68 billion. This allows Gundlach to be pretty nimble and make smaller bets that pay off big. The results are beating PTTRX’s returns over the last three years. Moreover, TOTL comes without sales loads and a low expense ratio of 0.65% or $65 per $10,000 investment.

All in all, investors holding PTTRX may be better suited swapping out for the smaller and better-performing rival.

Vanguard Dividend Appreciation ETF (VIG)

Replaces: Vanguard Equity Income Fund Admiral Shares (VEIRX)

Expense Ratio: 0.06%

Low-cost ETFs to buy can provide a better return in many instances versus actively managed funds with similar strategies. Case in point, the Vanguard Equity Income Fund Admiral Shares (MUTF:VEIRX). VEIRX offers investors a way to play dividend stocks and the income they generate. The fund is managed by both Wellington Management and Vanguard’s Quantitative Equity Group. The two use slightly different methods. But the general idea is to buy strong dividend-paying stocks with plenty of quality behind them. And the fund has been great for investors — netting a 13% average annual return over the last five years.

But how would you like get a more than a full percentage point per year in return? Swapping out VEIRX for the indexed Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) can make that happen. VIG follows those stocks that have long histories of increasing their dividends every year. This strategy provides a way for investors to grow their income potential and benefit from great long-term returns. VIG still throws off plenty of dividend income. The best part is that the ETF has managed to outperform the actively managed mutual fund by a decent margin.

The reason? Expenses. As one of the lowest-cost ETFs to buy on the market, VIG’s cheap 0.06% expense ratio creates zero drag on returns. Also creating zero drag is the fact that the mutual fund needs to hold some cash for investor redemptions. The combo creates a slightly better return for a similar strategy.

In this case, investors looking for dividend income would do well to swap out VEIRX for VIG. In the end, the exchange-traded fund’s total returns are better.

iShares Core S&P 500 ETF (IVV)

Replaces: iShares S&P 500 Index Fund (BSPAX)

Expense Ratio: 0.04%

Index funds are great. Expensive index funds are not so great. And sometimes, it’s the same asset manager that’s pulling the wool over investors’ eyes. A prime example is the iShares S&P 500 Index Fund (MUTF:BSPAX).

Despite having the “iShares” name, BSPAX is a mutual fund. A few years ago, BlackRock (NYSE:BLK) rebranded all its index funds under the banner. And there is nothing wrong with BSPAX. It tracks the bread-and-butter S&P 500 and is found in many 401k plans as the broad index option. So, it’s easy to see why all share classes of the fund have more than $22 billion in assets. The problem for BSPAX and other share classes is that there literally is a cheaper, identical version of the fund from BlackRock — the iShares Core S&P 500 ETF (NYSEARCA:IVV).

Both IVV and BSPAX track exactly the same basket of stocks. The difference is that the mutual fund charges 0.35% in annual fees. IVV only charges 0.04%. Since they are identical, IVV will always outperform BSPAX. This outperformance grows when you factor in that some share classes of the mutual fund charge front-end loads and require certain cash holdings. Because of this, there is almost zero reason to hold BSPAX if you can make the switch. Over the longer haul, IVV will provide a better return for holding literally the same basket of stocks.

So even among index funds within the same asset manager, low-cost ETFs are often the better choice for portfolios.

 At the time of this writing, Aaron Levitt did not hold any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/3-etfs-to-buy-instead-of-popular-mutual-funds/.

©2023 InvestorPlace Media, LLC