Key Points
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Mutual funds and exchange-traded funds are both pooled investment vehicles.
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Exchange-traded funds have important advantages over mutual funds.
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I plan to use ETFs in 2027 to provide diversification, freeing me to focus on high-conviction individual stocks.
I remember when the first exchange-traded fund (ETF) was introduced. The company I worked for at the time was quick to see the benefits the unique structure offered, and created indexes for early ETFs to follow. At this point, you could easily use ETFs to satisfy all of your investing needs. But that’s not how I plan to use ETFs in 2027. Here’s why I still own mutual funds and stocks, but also why ETFs will be an important part of my future investment plans.
What is an exchange-traded fund?
At its core, an exchange-traded fund is just a pooled investment vehicle. In that sense, they are very similar to mutual funds. Both products let investors pool their money together so they can hire professional management to invest on their behalf. If you have a regular life of any kind outside of Wall Street, ETFs and mutual funds could be the perfect solution to your investment needs.
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Essentially, mutual funds and ETFs let you focus on working, enjoying time with your family and friends, and saving money. The ETFs and mutual funds you pick handle the investing for you, with you only needing to keep tabs on what’s going on a few times a year (quarterly will probably be enough in most cases). That’s a win, even for more active investors like me (more on this below).
The big differences between mutual funds and ETFs boil down to cost and trading ability. Mutual funds tend to have higher expense ratios and often generate more capital gains that have to be passed on to investors. Also, they can only be bought and sold at the end of the trading day, which might be a good thing for some people, as it could stop them from making rash intra-day decisions.
It is a bit complex, and the fine details aren’t that important, but an ETF’s structure allows for extremely low costs, minimal capital gains distributions, and all-day trading, like a stock. So if you are looking at an index product with a mutual fund or ETF option, you’ll likely find the ETF option is less expensive. For example, Vanguard S&P 500 ETF(NYSEMKT: VOO) has an expense ratio of 0.03%. But the Vanguard 500 Mutual Fund has an expense ratio of 0.04%. That’s a tiny difference in absolute terms for an S&P 500 fund, but on a percentage basis, the mutual fund is roughly 33% more expensive to own. If you are looking to outsource your investing, ETFs are usually a good option.
How I use ETFs and mutual funds
For better or worse, I don’t have much of a life beyond Wall Street. So, I spend almost all of my time thinking about investing. I don’t want to simply hand all of my investing needs over to a pooled investment vehicle like an ETF or mutual fund. But I still use both and will likely increasingly use ETFs in 2027 and beyond to augment my investment portfolio.
I own two mutual funds from the Baron Fund Company, which focuses on small-cap stocks and growth investing. Those are two things I don’t focus on with my own investing, so I’m happy to outsource them to Baron. As for ETFs, I own Schwab U.S. Dividend Equity ETF(NYSEMKT: SCHD), Invesco High Yield Equity Dividend Achievers ETF(NASDAQ: PEY), and Amplify CWP Enhanced Dividend Income ETF(NYSEMKT: DIVO). The Schwab ETF leans into dividend growth, the Invesco ETF leans into high yield, and the Amplify ETF uses a covered call strategy. As a group, they provide a diversified dividend/income foundation.
Taken together, I’ve created an environment in which I can focus most of my energy on buying individual dividend stocks in which I have a high conviction. Essentially, I get to focus on what I believe I do best: buying well-run companies with impressive dividend histories while they have historically high yields. There’s likely to be some overlap between the stocks I buy and those in the ETFs I own, but because the ETFs are diversified, it really isn’t a big enough issue to worry about.
More money in ETFs is highly likely in my future
To be honest, I have relatively small positions in the three ETFs I own. That was by design, as I wanted to buy them and see how they fit into my broader investment approach. My experiment has gone well, so my plan is to add to them in 2027 and beyond, making them more foundational to my portfolio. Take your time to find the ETFs that work best for you, and you might end up doing the same thing even if you are a more active investor like me.
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Reuben Gregg Brewer has positions in Amplify ETF Trust-Amplify Cwp Enhanced Dividend Income ETF, Invesco High Yield Equity Dividend Achievers ETF, and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.