Fund Vehicles

Core Concepts

Vehicle Comparison: Decision-Relevant Differences

• Trading: ETFs trade intraday at market prices that can deviate from NAV (premiums/discounts, especially in volatile markets or for illiquid underlying assets); mutual funds transact once daily at NAV.
• Tax efficiency: ETFs generally distribute far fewer capital gains than mutual funds (mechanism below); SMAs allow lot-level tax-loss harvesting that pooled vehicles cannot.
• Customization: SMAs hold individual securities directly, so investors can exclude stocks/sectors and harvest specific lots; minimums are typically $100K-$1M+ with fees above index ETFs.
• Cost: broad index ETFs and index mutual funds cost as little as 0.01-0.05%; active mutual funds commonly cost 0.50-1.00%+ before any loads.

Expense Ratios

Total annual cost as a percentage of AUM, deducted from fund returns. Includes management fees, administrative costs, and sometimes 12b-1 distribution fees. The expense ratio is the single most predictive factor of future fund performance — lower-cost funds consistently outperform higher-cost funds within the same category.

Tracking Difference

The actual return gap between a fund and its benchmark index over a period. Tracking difference = Fund Return - Index Return. Expense ratio is a floor for tracking difference, but additional factors (securities lending income, sampling, cash drag, trading costs) can make tracking difference better or worse than the expense ratio.

Tax Efficiency and the Creation/Redemption Mechanism

The general tax-efficiency hierarchy: ETFs > index mutual funds > actively managed mutual funds.