Posts tagged TOAMS Financial
A grownup conversation about ETF’s vs. Mutual Funds with TOAMS Financial’s Mario Payne
A grownup conversation about ETF’s vs. Mutual Funds with TOAMS Financial’s Mario Payne
 

Bobbi and Mario discuss the pro’s and cons of Exchange Traded Funds and Mutual Funds, including the dangerous and potentially very expensive red flags grownups need to know about before they invest. 

 
 
 
 

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Full Transcript:


Bobbi Rebell:
Hey, grownup friends. A big thank you to so many of you that have already bought my new book, Launching Financial Grownups: Live Your Richest Life by Helping Your Almost Adults Kids Become Everyday Money Smart. This book was not easy to write, because I had to get honest with myself about what was working with my teen and young adult kids and what was not working, and I also had to be prepared to share it with all of you. First of all, thank you for your support and your wonderful responses to it. There's definitely some things in there that you may not have been expecting to hear. By the way, I got a lot of help from my money expert friends and also financial therapists and parenting experts. I am really happy with how Launching Financial Grownups came out, even though it really was hard to be, like I said, that honest. It was a lot of work, but I really loved doing it and I'm really happy with how it came out.

Bobbi Rebell:
On that note, if you have not already, please pick up a copy of Launching Financial Grownups today. After you do, please share it on social media. Please leave a review on Amazon, those reviews are super important because the algorithm picks up on them and that can make the book a lot more visible to more people. I truly appreciate it and I really also appreciate all of your support.

Mario Payne:
That probably means that it got lucky one year, but over three or five years, not so much. It's like a basketball player, a basketball player might have one good year, but over five years, if they're not good, not so much.

Bobbi Rebell:
You're listening to Money Tips for Financial Grownups, with me, certified financial planner, Bobby Rebell, author of Launching Financial Grownups, because you know what? Grown up life is really hard, but together we got this.

Bobbi Rebell:
Welcome, grownups. This episode is one I have been wanting to do for quite some time for all of you. We're going to answer the questions so many of you have been asking about investing in ETFs versus mutual funds, now, an ETF stands for exchange traded fund, whether maybe in some cases it makes sense to have both in your portfolio, for example, to serve different needs, at different times in your life, for different purposes, different goals.

Bobbi Rebell:
My guest is Mario Payne. Mario not only runs his own company, TOAMS Financial, he also has launched his own ETF. The symbol is LETB, L-E-T-B. I also want to point out, and this is important, that Mario is a fiduciary, he is a certified financial planner. That means he is someone who puts the needs of his clients first, something we grownups know to always ask for.

Bobbi Rebell:
In our interview, Mario and I cover the differences in investments that go into ETFs and mutual funds, basically how they work, how decisions are made, what the flexibility is of each one, what the downsides are, the pros and the cons also, regarding how expenses work, and what to look for when you're making a decision. We also talk about taxes and how the different vehicles fit into your investing and retirement goals. Most importantly, you need to stay to the end for this, we talk about some very scary and potentially expensive red flags that we all need to watch out for, especially some that, frankly, I had never really thought about.

Bobbi Rebell:
Here is Mario Payne of TOAMS Financial and the LETB ETF.

Bobbi Rebell:
Hey, Mario Payne, you're a financial grownup. Welcome to the podcast.

Mario Payne:
I am a grownup. Thank you for having me, I really appreciate the opportunity.

Bobbi Rebell:
Well, I invited you on this podcast because you are an expert in ETFs and you're going to be giving us some tips on ETFs and how we can all better invest with our eyes open and really understand the difference between ETFs and mutual funds, as well as other kinds of investments. A lot of people don't really know a lot about that.

Bobbi Rebell:
First of all, you were very much in the ETF business this past February. Your company launched an ETF, tell us more about that. It's on the New York Stock Exchange, by the way, the symbol, I like this too, L-E-T-B, LETB. Tell us about that decision and what's involved in setting up an ETF, because a lot of companies would really just go with a mutual fund. You chose an ETF.

Mario Payne:
We launched our fund February of this year. We've been doing the same strategy in my practice since 2019, as the market continues to go up. Before 2022, of course, we had some great returns for our clients. As we launched, it was great, because as the market was going down our clients inside our ETF have not been affected as much a negative way. Yes, there's still losses. Nobody knows, but God, the future, so we don't know from a day-to-day basis how your money's going to grow, but if we're able to have your money grow consistently and not have the dips of the market, then you should be in good shape. We hope that our ETF continues to do that.

Bobbi Rebell:
Just to time stamp this, we are recording this in August of 2022. If you listen to this further into the future, you can at least put it in context. Hopefully, the market will be up from here. But tell us about ETFs. A lot of our listeners are confused sometimes about why or what is the difference between an ETF and a mutual fund, can you explain it, and then we'll get into some of the different nuances that people should also be aware of when they're making investment decisions.

Mario Payne:
An ETF is called an exchange traded fund. E, exchange, T, traded, F, fund. It's sold actually on the New York Stock Exchange or on the stock market, so it's liquid. If I sell an ETF, it's like selling a stock. I'm able to get my money back right then and there, it's liquid, it doesn't take as many days to settle. A mutual fund is not sold directly on the New York Stock Exchange. It's sold through the company it's with, the fund company. You have what you call NAV, net asset value, which is different than shares on the market. It's not as of liquid. If you sell a mutual fund, it can take up to three business days to settle, which means it may take you longer to take the money out of your account after you sold that investment. That's really one of the differences.

Mario Payne:
Another difference is, from an investment standpoint, the expense ratio. Typically when it comes to an ETF they historically, not all, but historically they have a lower expense ratio. An expense ratio is the hidden fee that you pay for that ETF provider to manage and hold that fund. With mutual funds, historically, those expense ratios are a little bit higher. If I have a higher expense ratio, my performance may not be as good. If I have the same let's say $10,000 to make the math easy and I have one ETF that has the expense ratio of let's just say 1% and I have a mutual fund, same investments, same performance, but that expense rates ratio is 2%, well, that 1%, which would be a hundred dollars, is less than $200 with the mutual fund. All things being equal, my ETF will perform better with the same investments than my mutual fund, because the expenses are not as much. Those are really the two big differences between an ETF and a mutual fund.

Bobbi Rebell:
I was on the debate team in high school. I was actually president, very proud of it still. I'm going to throw a debate question your way. What you've said so far basically makes the case saying ETFs are a slam dunk, so much better, they're cheaper, you can access your money better, but Mario, a lot of people still buy mutual funds. Make the case for mutual funds, there must be some advantages.

Mario Payne:
Yeah, in its advantage, you're definitely diversified. A mutual fund is a pool of invest. Think about a swimming pool. If we have a hundred swimmers, we might have 90 swimmers that are doing great, they're free styling, they're doing the backstroke, breaststrokes, they're doing all types of swimming moves that the average person cannot do, and then you might have five swimmers that are not doing good at all. A mutual fund manager will act as a lifeguard. He or she will take those bad swimmers or bad stocks out of that pool. The thought process is if we continue to take out the bad stocks or bad swimmers at that pool, then my mutual fund is going to grow. Since it's diversified, if I have enough good and not as many bad, then even with the market going down, hopefully your mutual fund does not go down as much as the market. That is the case for a mutual fund.

Mario Payne:
Also with the mutual fund, from a retirement planning standpoint, if you have a 401k, a 403B, a deferred comp retirement plan, those mutual funds offer target date funds. If I am 40 years old, per se, and I want to retire when I'm 60, I might get me a target date fund that's in the year 2040 or 2045. That mutual fund, on a quarterly and annual basis, changes the way that investment in that mutual fund is invested to be where your age is. As I get older, it's going to be more conservative. If I'm younger, it's going to be more aggressive. That allows you not to have to check your balance on a day-to-day basis, not look at the market, not make changes in your 401k, your 457, because that target date does it for you. Those are some advantages of a mutual fund.

Bobbi Rebell:
It sounds like there's legitimate reason why the costs are higher and it's just a question of what your priorities and your needs are, which kind of investment vehicle you're going to use. Within a mutual fund, you've just explained how the manager can make adjustments based on their judgment on how different stocks are going to perform. Is an ETF managed at all? Can someone come in and make adjustments or is it set in stone, sort of what's in it is what's in it is what's it?

Mario Payne:
That's a great question. You have two types of ETFs. You have passive ETFs and you have active ETFs. The passive ETFs are things that are like an S&P 500 ETF or NASDAQ or a Dow Jones ETF, where it just mirrors what the index is. The S&P 500, top 500 companies in America, there are different ETFs that just pick those five stocks and they just let it be. Since this passive is not being managed, no one is picking up one bad stock, putting in another good stock. If the index is down, you're down. If the index is up, you're up. It's not being managed.

Mario Payne:
But then you have active ETFs, and our fund, LETB, that is an active ETF, where it is actively being managed just like a mutual fund. If it's good stocks, great. The bad stocks that are inside that ETF, then that ETF manager, he or she is pulling those out. With our ETF, LETB, it's automated. We have proprietary systems that automatically pick and choose what investments from a stock standpoint are going good. We put those in there, what investments are about to go down, and we hope to take those bad investments out that ETF before it happens so we can maximize your gains and minimize your losses. So depending on what type of ETF that you have.

Mario Payne:
Now, typically, a passive ETF, since it's less management, it's going to be less. The expense ratios on a passive ETF are very, very low compared to an active ETF. An active ETF, those expense ratios that you don't see, but they're there, they're going to be a little bit more.

Bobbi Rebell:
If you do not sell any shares of a mutual fund or an ETF, do you sometimes pay taxes if the manager is selling the assets inside, if they're switching out the different stocks that they have, the different holdings, and there are capital gains within there? How does that impact your taxes year to year and your cost basis, if at all?

Mario Payne:
Yeah, great question, two part. From a dividend standpoint, if that ETF or mutual fund is paying you a dividend, then yes, you will receive a 1099 if it's in a non-retirement account. If it's inside a retirement account, like a Roth IRA, traditional IRA, 401k, then no, you're not going to receive a 1099. But if it's not a dividend, the only way that ... Well, let me take that back. If it is a dividend, then you will pay taxes. If it's not a dividend, then no.

Mario Payne:
What happens is that if the mutual fund manager or the ETF manager in an active ETF are making changes, that's built into that expense ratio and they charge taxes inside the fund. You will not receive a 1099 or a tax form. In January, if it's a $100 stock that's bought, and in December it's sold for $50, that $50 gain, you're not going to get a 1099 for because it's inside of that fund. Now, it's going to be a charge, it's going to be a charge and that's going to be tied into your expense ratio, again, that hidden fee that you're paying that you don't see, but as far as getting a separate 1099 because he or she is actively managing your ETF or your mutual fund, no, you will not receive a 1099 for that.

Bobbi Rebell:
Finally, I want to ask you, can you discuss the red flags investors should look for if they're interested in investing in ETFs, and then separately red flags for mutual funds?

Mario Payne:
Number one, expense ratio. Yes, expense ratio means a lot of management, but that does not mean it's good management. If the expense ratio is high, we might want to pump the brakes. That's number one, from a mutual fund standpoint and a ETF standpoint.

Bobbi Rebell:
What would be high? Ballpark, what would be a red flag number?

Mario Payne:
Huh, That's tough. It's some mutual funds out there that have expense ratios that could be 1.5, 2, 2.5%.

Bobbi Rebell:
That's high, those numbers are high.

Mario Payne:
Yeah.

Bobbi Rebell:
Okay.

Mario Payne:
There's also different share classes you want to look into as well. When it comes to mutual funds, they have A shares, they have C shares, they have F1 shares. Those different shares depends on the price and the cost. Some, like C shares for instance, they may be a little bit higher, but then an A share, most people don't do upfront commissions anymore, but they do have A share investors, we pay an upfront commission, but then that hidden expense ratio that you don't see is very, very low. You want to look at the expense ratio.

Bobbi Rebell:
If you're buying a mutual fund through somebody, you should ask, "Are you getting a commission?" It's fine if they are, you should just be aware of it okay with it. Correct?

Mario Payne:
Correct. The certified financial planner in me, because I am a fiduciary, historically, fee-based is typically the best way to go from a just investment standpoint. Yes, it is a fee on an annual basis, but then a person can move from one investment to another, not have to worry about, "I charge you a commission, let me wait for two years because I don't want to overcharge you." You really should not be anything commission based anyways, to be honest. A lot of brokerage firms, not all of them, actually waived fees and commissions on ETF sales a couple years ago when the whole Robinhood explosion came and everybody was going to Robinhood in 2020 and 2019 because of the no commission. There really shouldn't be any commissions out there anyways, just to be honest with you.

Mario Payne:
That's my fiduciary hat, let me take that off and let me go back to the mutual fund and ETF expert. Another red flag, you do not want to, in my humble opinion, invest in something unless it has a nice track record. A one year track record in a five or 10 year bad track record does not mean it's a good fund, because every mutual fund and every ETF has what you call a prospectus. It's the legal document that tells you the historical information about the fund, how it's been invested, the managers, what it invested in. You can also Google fact sheet, so you can also go to Google and Google the fact sheet, which gives you that information. But it tells you the one year, the three year, the five year average.

Mario Payne:
It might be having a one year average that's very, very good, but then the three to five year average is not good at all. That probably means that it got lucky one year, but over three to five years, not so much. It's like a basketball player. A basketball player might have one good year, but over five years, if they're not good, not so much. You want to have a consistent good return.Those are some red flags to look at.

Mario Payne:
Also, funds that invest in "hot stock", the new funds that pop up, that they invest in hot stocks, you want to watch out for that. Last thing as well, performance wise, you have a lot of ETFs that are called leveraged ETFs, very important. A leveraged ETF is when the stock market goes up, it goes up double or triple. If you have a double leveraged ETF, if the stock market makes 1% for the day, that ETF is going to make 2%. That feels great, I've doubled the stock market. If the stock market goes up by 2% for the day, it makes 4%, that doubles the stock market.

Bobbi Rebell:
Sounds great.

Mario Payne:
Yeah, I know, right? But the bad part about that is when the stock market goes down, you lose double. The stock market goes down by 1%, you lose 2%, the stock market goes down by 2%, you lose 4%. If your risk tolerance is not aggressive to be okay with the roller coaster down and definitely okay with the roller coaster up, you might want to stay away from leveraged ETFs. Those leveraged ETFs usually have better performance than all ETFs because, again, they either double or sometimes triple the stock market.

Mario Payne:
Now, if you're an aggressive investor, you have that appetite for a diversification standpoint, you might want to look at that for some of your money from a ETF standpoint, but definitely just be careful because a leveraged ETF, the performance is great, but this year, right from January 1st to June, before the market bottom on June 13th, those leveraged ETFs did very, very, very bad compared to the market. You just want to watch out from a performance standpoint, if that's your end all be all, how to make the most money. Leveraged ETFs will look good from a performance standpoint, but I hope you have the stomach during the ups and the downs.

Bobbi Rebell:
I think people think they have the stomach until they don't. On that note, where can people get in touch with you and learn more about you and your ETF?

Mario Payne:
Yeah, yeah. Google, you can Google LETB ETF, our social media, our website, www.toamsfinancial. Our social media is TOAMS Financial. Again, our ETF, you just literally just Google LETB ETF. It's on all platforms, robinhood, Fidelity, TD Ameritrade. LETB gives you all the information we have, our fact sheets. The great thing about ETS and funds, they're transparent, so you can see our performance for the year as we did not go down as much as the market, how we invested, how we've been in cash for most of the year, so as the market's been going down, we've been in cash so you can't lose money when your money's in cash unless the word inflation comes up.

Bobbi Rebell:
I was about to say, we've got a little bit of inflation going on, Mario, but I'll let investors make that decision themselves.

Mario Payne:
Yeah, but literally just TOAMS Financial on all social media platforms and then LETB, L-E-T-B, B as a boy.

Bobbi Rebell:
Okay, my grownup friends, I told you those red flags were going to be eyeopening. What have your experiences been when it comes to investing in mutual funds or ETFs? Did you get any surprises, good experiences, not so good experiences? I'd love to hear from you. Get in touch, you can DM me on Instagram @BobbiRebell1, or on Twitter @BobbiRebell. Also, I want to help you learn more about personal finance and investing, so get on my newsletter list so I can send you more valuable information. You can sign up right on my website, at bobbirebell.com. Big thanks to Mario Payne of TOAMS Financial for helping us all be financial grownups.

Bobbi Rebell:
Money Tips for Financial Grownups is a production of BRK Media LLC. Editing and production by Steve Stewart, guest coordination, content creation, social media support and show notes by Ashley Wall. You can find the podcast show notes, which include links to resources mentioned in the show, as well as show transcripts, by going to my website, bobbirebell.com. You can also find an incredible library of hundreds of previous episodes to help you on your journey as a financial grownup.

Bobbi Rebell:
The podcast and tons of complimentary resources associated with the podcast is brought to you for free, but I need to have your support in return. Here's how you can do that. First, connect with me on social media @BobbiRebell1 on Instagram and Bobbi Rebell on both Twitter and on Clubhouse, where you can join my Money Tips for Grownups Club. Second, share this podcast on social media and tag me so I can thank you. You can also leave a review on Apple Podcasts, reading each one means the world to me, and you know what? It really motivates others to subscribe. You can also support our merch shop, grownupgear.com, by picking up fun gifts for your grown up friends and treating yourself as well. Most of all, help your friends on their journey to being financial grownups by encouraging them to subscribe to the podcast. Together we got this.

Bobbi Rebell:
Thank you for your time and for the kind words so many of you send my way. See you next time, and thank you for supporting Money Tips for Financial Grownups.

 
Bobbi Rebell KaufmanMario Payne, TOAMS Financial, CFP®