How To Replace Stodgy Mutual Funds With ETFs

Investors are increasingly migrating away from stodgy mutual funds to streamlined ETFs because of their low-cost, transparency and flexibility.

This trend has continued to gain steam as advisors recognize the majority of actively managed mutual funds are not able to consistently beat a passive benchmark over time.

While the concept and value proposition of transitioning to ETFs is sound, many investors may find themselves needing some additional guidance when it comes to replacing their existing mutual fund holdings. Fortunately, there are a variety of tools available that can assist with this process.

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The first step in moving to ETFs is to define the style of mutual funds that you are currently allocated to. This may include types such as large cap growth or mid cap value funds, which can then be matched to a similar exchange-traded fund.

It can also be helpful if your mutual fund has defined a benchmark, such as the S&P 500 Index, from which itgauges performance. If so, there is more than likely a matching ETF already available to invest directly in this theme.

The SPDR S&P 500 ETF (NYSE:SPY) and Vanguard S&P 500 ETF (NYSE:VOO) are two examples of ETFs that track this large-cap index.

Once you have those fund definitions, a tool such as the ETF Findercan be an invaluable screener to sort the available options. Selecting an appropriate asset class, category or focus can help you narrow down the number of choices.

After you are presented with a variety of ETFs to choose from, you are then able to compare index construction, historical performance, expense ratios, fund size and a host of other criteria. These important characteristics define the makeup of the ETF and how it will react under certain circumstances.

If that all seems complicated, another useful tool is the Mutual Fund to ETF Converter. This tool employs a similar mapping process of recognizing a mutual funds primary benchmark and recommending several similar ETF options. You can then screen and sort the categories to hone in on the best option to replace your existing holdings.

With a small amount of research and analysis, you can easily transition your investment portfolio to a more cost-effective and streamlined version. The ability to preserve your current asset allocation structure is also an added bonus.

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