Mutual Funds and ETFs

Today’s investors have many different types of investments from which to choose.  The most commonly used vehicles are ETFs (Exchange Traded Funds) and Mutual Funds. According to the independent research firm, ETFGI, $4.6 trillion worldwide is invested in ETFs. At the same time, mutual fund investments amount to $17.4 billion globally according to the research site, mutualfunds.com.  Combined, mutual funds and ETFs account for 70-75% of all investment holdings. They are found in Investment Accounts, Retirement Accounts, and Educational Savings Accounts. Still, in spite of their popularity and widespread use, most individuals know little about these investments beyond the advertisements they see. Providers such as iShares ETFs, Spiders ETFs, Oppenheimer Mutual Funds, Franklin Templeton Mutual Funds and others are widely advertised.


Mutual Funds are a professionally managed portfolio of stocks and/or bonds. Each fund has a specific strategy or focuses such as growth, growth, and income, etc. The goal of the fund is to outperform an index like the S&P 500 or Russell 2000. In order to achieve this goal, the fund manager is constantly buying and selling stocks and/or bonds to increase performance.  This is called active management. Mutual Funds are purchased through a mutual fund company by an investment company or brokerage house and a minimum investment amount is required. Fund prices are set by the fund managers at the end of each business day. Many investors purchase mutual fund shares as part of a periodic investment plan. Investors purchase mutual funds to gain access to stocks or bonds without having to purchase these securities individually. In addition, mutual funds are purchased to provide diversification, build wealth, plus generate income through dividends and capital gain distributions.


ETFs are a professionally managed portfolio of stocks and/or bonds. Each ETF has a specific strategy or focus such as growth, growth, and income, etc. However, the goal of an ETF is to replicate, not outperform, the performance of an index. Since the goal is to replicate an index, there is not as much buying and selling of stocks and/or bonds by the manager. This is called passive management.  ETFs are purchased on the stock exchange through an investment company or brokerage house and no minimum investment amount is required. Investors purchase to gain access to stocks or bonds without having to purchase these securities individually. ETFs are also purchased to provide diversification plus build wealth and generate income through dividends.

Mutual Funds and ETFs have much in common. Both are managed portfolios, offer diversification, and have some type of focus.  There are also key differences with regard to how each is purchased and the goal of each regarding an index. However, the biggest difference is the expenses and management plus capital gains taxes. Mutual Funds have higher internal expenses due to the active management required to “beat the index”; ETFs generally have low internal expenses fund due to the passive management required to “track the index”.  Mutual Funds generally declare capital gains each year which are passed on to the fund investors as taxable gains. ETFs rarely declare a capital gain which can be tax savings.

So, which investment should you use, Mutual Funds or ETFs?  There is no clear answer. Investing money in securities exposes investors to risks including loss of principal; past performance is NOT an indicator of future returns. You should carefully consider investment risks, objectives, charges, and expenses. An advisor and tax specialist can assist with the decision on whether a mutual fund or ETF would be better for your situation.

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor.  He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com. 

SEP IRA: The Retirement Account Especially for the Self-Employed

Since the beginning of 2017, the number of self-employed individuals in the United States has expanded greatly. According to a study by MBO Partners of Herndon, VA from July 2017, the self-employed population increased to 40.8 million individuals and represented 31% of the working population. Here in Carteret County and nationally, this trend is expected to continue. As the self-employed continue to grow their business and income, many will also begin to think about ways to fund their future retirement. If you are self-employed, have freelance income or a small business owner, a SEP IRA (Simplified Employee Pension) could be appropriate for you. A SEP IRA is a Traditional IRA specifically designed for these individuals. Contributions are made by the business into an IRA held in the self-employed individuals' name or the employee’s name. For an employee to receive this benefit, he/she must be at least 21 years old and has been an employee for 3 of the last 5 years. Contributions are considered tax-deductible to the business.

When it comes to making contributions to a SEP IRA, there are several important points that employers and employees need to know. First, employer contributions are not discretionary and cannot discriminate against highly compensated employees.  An employer can exclude employees with earnings under $600 and non-resident aliens with no source of U.S. income.  Contribution limits for 2018 are 25% of a participants pay or $55,000, whichever is less. If you are a self-employed individual, contributions are based on your self-employment income minus 50% of any self-employment taxes that have been paid. The deadline for establishing and contributing to a SEP is the employer tax filing deadline including extensions. Since SEP is a Traditional IRA, an employee may elect to make a separate contribution in their own name as well.  The Individual Contribution Limit for 2018 is $5500 plus an additional $1000 catch-up contribution for individuals who are age 50 years and older.  All contributions are immediately vested at 100% and the employee directs how they are invested. Finally, the employer does not have to make ongoing contributions.  

A SEP IRA is a great way for the self-employed individual to save for retirement as well as the small business to reward/retain its employees.  The plan requires minimal paperwork and tax filing documentation. Before establishing a plan, it is important to discuss the IRS regulations governing a SEP with a tax professional.  After speaking with a tax professional, an advisor can establish the SEP and recommend the appropriate investments. 

Matt Dressel is the Owner of the Independent Financial Solutions Group, a Registered Investment Advisor.  He is an Investment Advisor, Life Insurance Agent and does Financial Planning.  If you have any questions about this article, he can be reached at 252-515-0242 or matthewdressel.ifsg@gmail.com.