When looking at different investment choices, ETFs and mutual funds are most likely included in the conversation. For many investors, the difference between the two is not obvious.
Similarities Between ETFs and Mutual Funds
ETFs and mutual funds are both funds that hold underlying assets. Funds can hold hundreds of individual securities. Some ETFs and mutual funds hold only stocks, others hold only bonds, and some hold a combination of the two. Many of these funds are designed to track the performance of a specific index or sector, such as the S&P 500 or the technology sector.
Both ETFs and mutual funds make it easy to create a diversified portfolio with just a few investments. Rather than buying individual stocks and bonds, investing in funds gives the investor exposure to hundreds or thousands of individual securities. Funds allow the investor to spread out their risk. If you are just invested in a single company, then your portfolio’s return is tied to the success or failure of the company.
Mutual funds and ETFs are managed by portfolio managers whose job is to choose the individual investments that will make up the fund.
Differences Between ETFs and Mutual Funds
ETFs are listed on major stock exchanges just like individual stocks. Similar to stocks, ETFs can be traded throughout the day with the price fluctuating all day long. Mutual funds are traded directly with the fund company. They are priced after the markets have closed at the end of the day when the fund’s net asset value is calculated. So if you wanted to invest $10,000 in a mutual fund priced at $100 a share, you’d simply place a $10,000 order and receive the 100 shares at the end of the trading day.
A lot of mutual funds, and some ETFs, are actively managed by a fund manager. Active managers try to beat the overall market and usually come with a higher expense ratio than you would find with passively managed funds. ETFs usually have lower expenses than mutual funds. ETFs also are usually more tax-efficient than mutual funds.
Bautis Financial would be happy to talk through whether ETFs or mutual funds might work for your specific situation. You’re welcome to schedule a complimentary consultation with our team of financial advisors using the link below.