Mutual Funds and ETFs: What’s the Difference?
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Financial advisors recommend that one of the best ways to keep your investments strong is to diversify them. One way to achieve this is by means of investing in mutual funds or exchange-traded funds (ETFs).
These investment funds allow you to have multiple holdings in a wide range of options, from stocks to bonds, according to Experian, one of the consumer credit reporting companies.
By investing in a mutual fund or ETFs, you can have a range of holdings via a single purchase, thus making your portfolio carry less risk than a singular investment.
Mutual Funds
A mutual fund consists of a group of investment owners who contribute cash and is overseen by professional managers that trade and oversee a group of investments that makes up a fund.
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The group of investments can vary by security type, by industry type, and by geography (i.e. U.S. securities or overseas holdings).
With all these variations in a mutual fund, there are likely funds that you will find to fit into your investment goals. The cost of buying into mutual fund shares is determined at the close of the market at the end of the day. Because of this, the fund is not as influenced by the daily ups and downs that occur during the course of the trading day.
The initial investment into a mutual fund is anywhere from $500 to $5,000.
Once you have bought into the fund, you can increase your contributions as you desire, such as using payroll deductions. A professional who trades the investment holdings in the hopes of outperforming the average market returns, and who gets compensated by a portion of the fund, is the manager of the mutual fund.
Exchange-Traded Funds (ETFs)
Just like mutual funds, exchange-traded funds pool funds into specific market accounts; however, they are traded daily like stocks.
Due to them being able to be traded on a daily basis, ETFs pricing fluctuates with the supply and demand of the market. This does give the opportunity for seasoned investors to buy low and sell high as the market gains and loses throughout the trading day.
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But, this does not mean that ETF’s were designed to be bought and sold on a daily basis like stocks. In fact, most ETFs have extra fees on trades or shares that have not been held for a specific amount of time.
Another difference is that you cannot purchase partials shares in ETFs. You must buy additional whole shares at prices that vary depending on the market at that time.
Which is Better?
Mutual funds and ETFs offer diversified investments in a single account, but they do have some differences and advantages as well.
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Mutual funds are intended to be invested over time that will span possibly over decades, with the expectation that the manager’s efforts beat the market, which leaves you with an investment that has grown at a rate that exceeds the market overall.
Although it must be noted that this is never a guarantee.
EFTs are more for the hands-on investor that likes to have greater control and who wants the opportunity to beat the market through more frequent trades.
In the end, whether you choose between a mutual fund or an ETF, it’s important to consider your comfort level with trading or not trading on a daily basis.
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