Mutual fund, BIF or ETF: which is better to choose?

They asked what is better to choose a mutual fund, BIF or ETF. This is a good question. But before I answer it, let’s take a brief look at the essence of each tool.

What do mutual funds, BIFs and ETFs have in common?

Unit investment funds, BIFs and ETFs are all instruments of mutual or collective investments, when the funds of investors or shareholders are pooled and invested in the fund’s portfolio. The portfolio is compiled depending on the fund’s strategy.

• The fund’s strategy can involve investments in a separate asset class (stocks or bonds), stocks or bonds of a particular country or different regions, or it can be a ready-made balanced portfolio.
• Different strategies – different portfolios – different risks. By buying one share of the fund, you become the holder of a part of the whole portfolio.

The fund’s money and assets are managed by a management company or fund provider. The transparency of the fund’s activities is monitored by the depositary, auditor and regulator. Therefore, investing in funds is considered safe, if you do not take market risk into account. In turn, investments in a ready-made portfolio provide diversification and eliminate the need to independently choose assets and manage them.

What is the difference between a mutual fund, a BIF and an ETF?

The main difference between a mutual fund, a unit investment fund and an ETF is that a unit investment fund (Mutual Investment Fund) is not traded on the exchange market, while a BIF (Exchange Traded Fund) and ETF (Exchange Traded Fund) are traded on the exchange.

In this regard, the units of a mutual fund can be bought in a management company without having a brokerage account. At the same time, a brokerage account is needed to buy shares of BPIF and ETF.

BPIFs and ETFs can be bought and sold at any time if the exchange is open, so they are more liquid. The situation with mutual funds is more complicated, because Mutual funds can be open, interval and closed.

• Shares of open-ended mutual funds can be bought and sold at any time upon your request to the management company.
• Shares of interval mutual funds can be bought and sold only within the terms specified in the terms of the fund.
• Units of closed-end mutual funds cannot be sold until the end of the period of existence of the mutual fund.

Thus, the most liquid option is an open-ended mutual fund (it is important to understand that it will take time for the management company to submit an order and execute it).

Mutual funds, BIFs and ETFs are formed by the management company, as a result of which a management fee is taken. This commission is taken into account in the value of the fund unit. In the case of BIFs and ETFs, such a commission is all you pay for owning funds (plus broker commissions for buying and selling shares).

In the case of mutual funds, it is again more difficult and more expensive. In mutual funds, there may be premiums on the purchase and discounts on the sale. All this reduces the profitability when investing in the latter. Therefore, mutual funds can be relevant only for those who, for some reason, cannot have a brokerage account. If a brokerage account is not a problem for you, then it is definitely more profitable to invest in exchange-traded mutual funds. It remains to decide what to choose: BPIF or ETF.

What to choose: BIF or ETF?

As we have already found out, you need a brokerage account to buy exchange-traded mutual funds or ETFs. If you have an account with a foreign broker or have the status of a qualified investor with a Russian broker, then you have access to global ETFs from the world’s largest providers (Vanguard, Blackrock, SPDR, VanEck, etc.).

These ETFs have the lowest management fees (from 0.03% per year). A foreign broker has no entry threshold, you can buy at least one share of the fund. Russian brokers have an entry threshold, and each broker has its own size.

If you trade through a Russian broker without the status of a qualified investor, then a certain list of BIFs and ETFs is available to you. At the same time, a BIF is considered a Russian instrument, and an ETF is considered a foreign one (those ETFs that are on the Moscow Exchange are issued by foreign companies in accordance with European standards).

Therefore, an ETF, regardless of what assets it consists of, is considered a foreign financial instrument. In this connection, such funds are prohibited for some civil servants. However, if there are foreign assets inside the BPIF, then such a fund will not work for some civil servants either. Consider the moment. Management fees for Russian ETFs and BPIFs from 1% per year, you can find a complete list of funds in your broker’s application.

Also, BPIF and ETF have differences in taxation, because Russian ETFs are registered abroad, and BPIFs are registered in Russia. As a result, BIFs do not pay tax on dividends of Russian companies, but pay tax on dividends of American companies and funds at a rate of 30%. For comparison: when buying American ETFs through an overseas broker, the dividend tax on US companies and funds will be 13%.

In the dry residue

• Unit investment funds, BIFs and ETFs are collective investment instruments, when the funds of investors or shareholders are pooled and invested in the fund’s portfolio.
• The main difference between a mutual fund, a BIF and an ETF is that a mutual fund is not traded on the exchange market, while the BIF and ETF are traded on the exchange. The price of a unit investment fund is calculated at the end of the day. The BPIF and ETF rates change during the trading session.
• BIFs and ETFs can be bought and sold at any time if the exchange is open. A mutual fund can be sold through a management company and on time, taking into account the type of fund. Therefore, the liquidity of BPIFs and ETFs is significantly higher than that of unit investment funds.
• All mutual funds, BIFs and ETFs charge a management fee. In mutual funds, there are still additional commissions (surcharges and discounts), in BPIFs and ETFs they are not.
• An account with a foreign broker or the status of a qualified investor with a Russian broker gives access to global ETFs from global providers. Such funds are larger in terms of assets under management and are significantly cheaper than their Russian counterparts in terms of management fees.