ETF Selection Criteria

I wish to invest in the banking sector and want to decide between a banking mutual fund and banking ETF. I notice that Banking ETFs have much lower expense ratio than banking mutual funds. I wish to make an initial lump-sum investment and hold for 3-5 years.
- Shini Ballu

The difference between a banking sector fund and a bank ETF is that a bank ETF is a passive fund that invests similar to the CNX Bank Index compared to the banking sector fund which invests in stocks of companies engaged in the banking and financial services activities. As ETFs are passive funds, they have a lower expense ratio, which should not be the only criteria for fund selection. You should look for a fund that suits your investment needs and fits in with your financial plans and goals. A banking fund is a sector fund and these are risky in performance, make sure you understand the risks associated before investing in it.

This article was originally published on June 22, 2011.