In this article, we’ll cover:

• Similarities between ETFs and mutual funds
• Differences between ETFs and mutual funds
• Choosing the right fund for you

Similarities between ETFs and mutual funds

You can think of any fund, whether an ETF or mutual fund, as a basket of securities. When you buy shares of a fund, you’re investing in all of the assets it holds. The fundamental ways in which ETFs and mutual funds work is quite similar: 

• Diversification: Each type of investment vehicle holds a collection of different securities or asset classes, which can be an efficient way to add diversity to your portfolio.
• Fees: Both ETFs and mutual funds have some fees associated with them, such as transaction or management fees. 
• Investing strategy: Every fund has a particular strategy that guides the investments it holds. You can choose funds associated with industry sectors, geographic regions, investment approaches, and more.
• Liquidity: Both ETFs and mutual funds are generally quite liquid, meaning you can sell your shares for cash relatively quickly
• Risk: All investment comes with risk, including the risk that you could lose money. ETFs and mutual funds are no different, and the risks vary depending on each individual fund. 

Differences between an ETF and a mutual fund

On the surface, ETFs and mutual funds seem very much the same. But understanding the key differences can help you make the appropriate investment decision for you. Mutual funds and ETFs differ in terms of their trading flexibility, minimum investing requirement, management style, costs and fees, and tax efficiency.

Trading flexibility

ETFs can be bought and sold on an exchange, just like individual stocks. That means their prices fluctuate throughout the trading day along with the market. On the other hand, mutual fund prices are calculated at the end of each trading day. This calculation, known as the net asset value, or NAV, is the per-share value of a mutual fund’s assets minus its liabilities. Instead of purchasing mutual funds on an exchange, investors buy and sell mutual fund shares directly from the fund or from a brokerage that sells the fund.

Minimum investing requirement

In general, mutual funds require a minimum investment amount. Minimums will vary depending on the specific fund, but they can be several thousand dollars. Many funds allow the purchase of fractional shares, meaning you can purchase just a portion of a share instead of a whole one, you’ll generally still have to invest the minimum required amount of money. In contrast, ETFs can be purchased as single shares, so there is no minimum required beyond the cost of a single share. Fractional shares are usually available as well.

Management style

Mutual funds tend to be associated with an active management style that involves frequent buying and selling to outperform a specific benchmark or index. An actively managed mutual fund typically has a portfolio manager and other team members who use their expertise to make ongoing decisions about the fund. ETFs, in contrast, are usually associated with a passive management strategy that does not require a decision-making team because the fund is built to track an index like the S&P 500 or the Dow Jones Industrial Average.

Cost and fees

Mutual funds tend to have higher management fees because they are actively managed by portfolio professionals. They’re also likely to have higher transaction fees due to the frequency of trading. ETFs generally have lower expense ratios than mutual funds. Many ETFs trade for free, though some may require a commission. Transaction fees are typically lower for ETFs, and they don’t carry sales load or redemption fees like mutual funds.

Tax efficiency

Generally speaking, the overall operations of an ETF are more tax-efficient than mutual funds. Due to the way ETFs are structured, they often sell shares in a manner that triggers fewer taxable events. Mutual funds pay investors capital gains distributions, so their tax implications tend to be higher. 

Choosing the right investment fund for you

There is no “one size fits all” answer to investing. Choosing the type of investment fund that’s right for you takes careful consideration. Take the time to assess your investment goals, risk tolerance, and preferences about how involved you want to be in the day-to-day management of your investments. 

• Investment goals: Knowing whether your investment goals are long-term, like saving for retirement, or shorter-term, like saving for a home purchase, will help you determine the type of investments that make the most sense for you. 
• Risk tolerance: Reflect on the level of risk you’re comfortable with. Are you a conservative investor who prefers more stability, even if that leads to lower returns? Or are you comfortable with a more aggressive investing style that takes on more risk of volatility in the hopes of higher returns?
• Level of involvement: Are you more of a hands-on investor or a “set it and forget it” investor? Actively managed funds, like mutual funds, take more effort and direct involvement than passively managed funds, like most ETFs. 

Additionally, it’s important to evaluate the fees, expenses, and performance history associated with any particular fund. Mutual funds and ETFs will each have a prospectus that outlines investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. 

• Fees and expenses: A fund’s fees and expenses can add up quickly. Consider the benefits and drawbacks of every expense that may come along with choosing an investment fund. Remember that while ETFs tend to have lower fees than mutual funds, every fund is unique, so check on the fees for every fund you’re considering. 
• Fund performance and history: Historical data can show you how a fund has performed over time, how well portfolio managers have handled previous ups and downs, and offer some insight into how the fund may perform in the future. 

ETFs vs. mutual funds: the bottom line

If you’re looking to diversify your portfolio, both ETFs and mutual funds may be investments worth considering. When you’re getting started as an investor, a fund may provide an accessible entry point, giving you access to a variety of securities with a single investment. And you don’t necessarily have to choose between ETFs vs. mutual funds; you may decide that both have a place in your investing strategy. You can invest in a wide variety of ETFs with Stash, and thanks to fractional shares, you can get started with any dollar amount. 

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The post ETFs vs. Mutual Funds: Which Is Right for You? appeared first on Stash Learn.

Instead of keeping your disposable income in a savings account that earns very little, Stash recommends that you safely invest in an exchange-traded fund (ETF) that we call “U.S. Treasury Income,” more often known as iShares Treasury Floating Rate Bond ETF (ticker TFLO). As of February 10, 2023, U.S. Treasury Income pays a monthly distribution that equals 4.56% a year.

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TFLO frequently asked questions:

How does TFLO compare to rates paid by banks on savings accounts?  

As of January 17, 2023, the national average interest rate being paid on savings accounts is 0.33%. That means if you put $100 in a savings account, you would have $100.33 a year later (and possibly less if your bank charged you a monthly fee.) Many Americans have become accustomed to earning nothing on their hard-earned money. It has been commonplace for consumers to keep their cash at a bank and be paid little to nothing from their bank. But this hasn’t always been the case. 

During the 1990s, it was common for banks to pay 4-5% per year on savings accounts. In the 1980s, rates being paid on savings accounts were as high as 8%. During the Financial Crisis of 2007-2008, however,  the Federal Reserve (the “Fed”) cut interest rates to zero in order to stabilize the banking and financial system. The Fed uses interest rates to fuel or slow down the economy,similar to how you use  your gas pedal and brakes on your car. The Fed cuts rates to speed up the economy and raises rates to slow the economy and reign in spending. 

Last year, you may have heard people talking about inflation or you may have experienced it first hand when the prices of most everything went up. At the start of the pandemic, governments around the world, including the U.S., “printed” trillions of dollars in order to support the global economy. This decision led to excess spending by people and companies, which drove up demand (and thus prices) of many goods and services. In addition, pandemic-related shutdowns, coupled with Russia’s invasion of Ukraine, led to supply chain issues which further exacerbated the inflation issue. In order to address inflation and reign in spending, the Fed began the process of raising interest rates.

Typically the rates that you earn on your cash at a bank are determined by the interest rates set by the Fed.  However, despite higher interest rates, banks have not yet increased the amount they are paying to hold your cash. The good news is that there are investment products that offer high monthly distributions with limited investment risk. 

What is an Exchange-Traded Fund? 

An exchange-traded fund (ETF) is an investment that trades like a stock. However, ETFs are funds that hold a combination of stocks, bonds and/or other securities. Generally, by holding a bucket of different investments, ETFs balance risk and are safer than investing in one asset. Some ETFs track a market sector like energy or technology, while others mirror an index like the S&P 500. U.S. Treasury Income is an ETF that invests in U.S. Treasury obligations, which are considered the safest investments available as they are backed by the U.S. Government.  

Similar to a stock, an investor generally can earn money from an ETF in two ways: an ETF price increases or pays dividends. For example (purely for illustrative purposes),  if an investor named Gabby purchases an ETF that costs $50 and then next year, the purchase price increases to $60, Gabby has made $10, if she chooses to sell her position. If the ETF price drops, then Gabby would lose money. Gabby could also make money through an ETF’s dividends. These are part of the fund’s earnings and capital gains. Not all ETFs pay dividends, but many do. To see if an ETF pays dividends, Gabby would want to look at the potential dividend yield, which is the amount the fund pays out compared to the current market price of the share. At Stash, we recommend looking at the 30 Day SEC yield for all ETFs, as this is a standardized number that all ETFs publish. You can find this in the dividend yield section of all ETFs on Stash.

Now, here’s what’s different about U.S. Treasury Income. Unlike the example above, because of the underlying Treasurys that this ETF holds (more on this below), the price typically does not change that much. In fact, during all of 2022, the daily price change (adjusted for monthly distributions) stayed in a range of -0.10% and +0.15%. In full disclosure, Stash can’t guarantee this level of stability going forward, but based on the ETF’s underlying holdings, it would be reasonable to assume this pattern in the future. 

Instead of making money through price changes, U.S. Treasury Income pays a monthly distribution each month that is based on the most current interest rate. As of February 10, 2023, these monthly distributions add up to over 4.56% per year.  As long as the Fed keeps interest rates at these levels, U.S. Treasury Income should pay a similar monthly distribution. The current expectation is that the Fed will continue to raise rates in 2023, so this distribution may increase. If the Fed were to cut rates, then the distribution would decrease.

What are Treasurys? 

The U.S. Treasury, established in 1789, is most well-known for its job of raising money for the government’s expenses. The Treasury primarily raises this money through taxes and borrowing money from investors in the form of various Treasury obligations such as Treasury Bills, Notes, and Bonds (“Treasurys”). Treasurys are loans to the U.S. government for a set period of time, in exchange for a set rate of return or yield. When an investor chooses to purchase a Treasury with cash, they loan their money to the government. In exchange, the U.S. government promises to pay back the full loan amount (principal) plus interest over the life (maturity) of the loan. These Treasurys make regularly scheduled payments throughout the loan term. Treasurys are considered to be low-risk because they are backed by the U.S. government. In fact, unlike many other borrowers, the U.S. government can just raise taxes or print more money in order to pay its obligations. Many investors purchase Treasurys to diversify their investments, especially if they want to put their idle cash to work. As cash sits in a low to-no-interest bank account, inflation chips away at its value, so many investors put their money in a Treasury as a more productive alternative. 

What is the actual ETF?

At Stash, we know that the actual names of ETFs are sometimes long and confusing which is why we put shorter names that aim to simply describe what the ETF is. In the case of U.S. Treasury Income, the actual ETF is the iShares Treasury Floating Rate Bond ETF (ticker TFLO). Learn more about the ETF here. iShares, which is owned by Blackrock, is the largest provider of ETFs based on assets under management. Stash does not have any economic relationship with iShares.  

What does U.S. Treasury Income hold?

U.S. Treasury Income holds a combination of U.S. Treasurys that have a fluctuating interest rate. These Treasurys are called floating rate notes (“FRN”) and are short-term loans to the U.S. government that pay investors an income based on current market interest rates.

The U.S. government began issuing these FRNs in 2014. The interest rate on these FRNs resets weekly to the rate paid on the most current 3-month U.S. Treasury Bills. Since the interest rate resets every week, the value of the FRNs does not change. Typically the price of a debt security moves in the opposite direction of interest rates, so when interest rates rise, the price of the debt security goes down. That is not the case with these US Treasury FRNs. Since the TFLO ETF holds these Treasury FRNs, the price of the ETF tends to be very stable. As interest rates move higher, these FRNs pay out more, thus the ETF has more income to distribute and investors can benefit from the higher yields sooner.

As an added bonus, since TFLO holds U.S. Treasurys, virtually all of the income earned from distributions is state and local tax-exempt. 

How much should I invest in U.S. Treasury Income?

While Stash always recommends investing for the long term in a diversified portfolio, we know that many people may have short-term cash needs (for example, a large planned purchase within the next year) which may have some short-term risk associated with it. In these cases, we recommend investing this idle cash in U.S. Treasury Income as it offers a nice monthly distribution, is extremely safe relative to most investments, and offers daily liquidity or access while the stock market is open.  

What are the major risks? 

No investment comes without risks; however, Treasurys are considered to be extremely low-risk. This is because an investor in Treasurys is getting a guarantee from the U.S. government that the loan will be repaid. While there is talk in the news about the U.S. hitting its debt ceiling in the coming months, investors still consider U.S. Treasurys to be the safest investment. The talk over the debt ceiling is the result of the U.S. running a budget deficit (e.g., spending more than it is raising from taxes) for many years. While the government will need to figure out how to resolve this, which will result in a lot of saber rattling by both political parties, Stash does not believe that an actual default by the U.S. government is a realistic risk. Ultimately, the U.S. government has many options, including cutting spending, raising taxes, or just agreeing to raise the debt ceiling. 

Another risk to be aware of is that U.S. Treasury Income is not an investment in actual U.S. Treasurys, rather it is an investment in an ETF that owns U.S. Treasurys. While there is some small risk of tracking error or trading errors (for example, the ETF does not perform inline with its underlying holdings), Stash believes that TFLO is one of the safer ETF investments available. Therefore, TFLO isn’t technically a risk-free investment (no investment is 100% void of risk), but it is considered by many investors as close to it. 

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The post How Investing in TFLO Could Earn You Passive Income appeared first on Stash Learn.

Here’s a look at some simple ways to invest with little money.

How to designate money for savings

Some investment tools can actually help you find some room in your budget for savings. 

Automating your investment contributions

Consider transferring money from your checking or savings account bank account into an investment account each month or each pay period. Start with an amount you’re comfortable with, such as $10, and aim to increase that amount over time. By automating the process, you allow your investment account balance to slowly increase without much effort on your part, and without running the risk that you’ll spend the money before you can save it. 

With Stash, you can automatically transfer money to your investments on a schedule by setting up Recurring Transactions. Remember though, there’s a difference between automating the movement of money to an investment account, where it may sit as cash, and using Recurring Transactions to move money into a specific investment. When you use Recurring Transactions to buy an investment, there is always the risk that you can lose money, as there is any time you invest in the stock market.

Consider investing windfalls

When you get an occasional, modest windfall—a tax refund, a check from a relative for your birthday, or a raise at work—consider earmarking those dollars for investing, instead of spending that money on a splurge purchase. 

Low-cost ways to invest it

Once you’ve identified the money you want to invest, you can make it go further with low-cost investment options and strategies.

Consider Using a low-fee robo advisor

Robo advisors are digital investment platforms that automate investment choices based on algorithms. Robo advisors can significantly cut down on the fees that human advisors typically charge. Robo advisors can also allow you to invest in a set of diversified portfolios of stocks, bonds, and other securities aligned to your goals. They can then manage it for you, helping to keep it balanced, for a small fee. Many robo advisors require a very low minimum investment, which means you can start investing with a small amount and deposit as much or as little as you want.

Look for low-cost investment funds with low minimums

Low-cost mutual funds or exchange-traded funds (ETFs) with a low or no minimum investment can offer an inexpensive way to access a diverse mix of investments, including stocks and bonds. While some funds may require a minimum investment amount, others may not.

Consider opening a retirement account

If you have access to a 401(k) through your job, contributing to it—especially if there’s an employer match on the table–can give you the chance to supercharge your retirement savings. That’s because funds put in your 401(k) can be automatically deducted pre-tax from each paycheck, so you won’t have to worry about moving the money yourself, and any growth will be tax-deferred and also subject to the power compound interest. You will have to pay taxes on that money once you start withdrawing from the account, usually at or after age 70 ½.

If you don’t have a 401(k) plan, consider opening a traditional or Roth IRA, both of which can offer tax advantages and allow you to invest your contributions. Contributions to traditional IRAs are made with pre-tax money.² Any growth of your investments is tax-deferred and withdrawals you make when you retire are taxed. On the other hand, contributions to Roth IRAs are made with after-tax dollars.³ Money in the account can grow tax-free and withdrawals made when you retire are not subject to taxes.

Look for high-yield savings account

If you’re working on short-term financial goals—like building up your emergency savings or paying down credit card debt—and you’re not ready to invest yet, consider keeping your cash in a high-yield savings account. A high-yield savings can account can pay more interest than a typical saving account, so with a top-earning high-yield account, your money could earn closer to 2% or more in interest compared to as low as 0.01% for regular savings accounts. With a high-yield savings account, you’re potentially earning higher interest than you would in most regular bank accounts, but you still have easy access to the money whenever you need it, and the higher earnings can help you reach your financial goals more quickly.

Build healthy habits

When you’re working with a tight budget, coming up with extra money to invest may feel impossible. Just getting started—opening an account and adding a little seed money—is often the biggest hurdle to investing. If you can commit to investing a small sum every week, month or year, you can give your money a chance to earn you returns over the long term.

There’s no need to wait to start investing until you’ve amassed thousands to put toward your first investment. You can start small and set goals for investing more as your budget allows.

With Stash, you can start investing with any dollar amount.

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