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Dec 16 2023
In this post, I aim to clear up the differences between ETFs and mutual funds. In my experience, people have often asked me how they differed, so what better way to spread the knowledge than to write about it here. You've probably heard that both options are great ways to get diversification in the market but do you really understand the mechanics of each investment? Well if you do great, keep reading and if not I'll go into some details to clear it up. Let's jump right in.
ETF (exchange traded fund): an investment fund listed and traded on a stock exchange. Think of ETFs like a basket of securities that trade on an exchange like the New York Stock Exchange or Nasdaq. Imagine a collection of tens or sometimes thousands of stocks pooled into a single fund under a single ticker symbol. You can buy and sell ETFs just like stocks but instead of this security representing a single company, ETFs represent n number of companies that are derived from the exchange. These securities are becoming more and more popular by investors it seems because of the diversification benefit.
Mutual fund: a professionally managed investment fund that pools money from a number of investors to purchase securities. A professional portfolio manager invests the investor pooled money into different securities and gains are passed to the fund contributors.
Ok, I think you should have a pretty clear idea of what these investments are, but they sound pretty similar you might be thinking to yourself. Can you give me some more clarity? Sure, let's explore the more granular details in the table I've created below.
| Context | Exchange Traded Funds | Mutual Funds |
|---|---|---|
| Transaction times during the trading day | Actively traded throughout the trading day just like stocks | Can only be bought and sold once per day |
| Pricing? | Prices fluctuate throughout the day, just like stocks | Priced once per day after market close based on NAV |
| How is the security managed? | Passively managed, most people buy and hold | Actively managed, a portfolio manager performs this |
| Management fees? | Low | High |
| Dividends available? | Paid out like stocks | Reinvested into the fund |
| Tax implications? | Pay less taxes | Pay more taxes |
| Minimum investment amount needed? | Just the price of the listed security | Most have minimum investments required |
Hopefully this short post helped clear up the details surrounding both investment vehicles. Be sure to check out my detailed post on ETFs and mutual funds as they come out! Until next time and thanks for reading!