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What is are ETFs and mutual funds?
The ETF. Your portfolio probably contains a fair amount of these—especially your IRA or 401k. But what is an Exchange-Traded Fund, and why have they increased in popularity since they were introduced in the early 1990s? ETFs, or Exchange-Traded Funds, deliver a diverse investment portfolio in a vehicle that’s as easy as buying stock but without the hassle of picking individual stocks yourself. They are filled with a mix of investments like stocks, bonds, or commodities.
Similar to an ETF, a mutual fund allows investors to invest in a grouping of stocks or securities, through an investment program funded by shareholders. The funds are generally managed by companies that have strong track records and credibility, and are actively, professionally managed.
How is an ETF different from a mutual fund?
If you’re thinking these two investment opportunities sound similar, you’re not wrong. Both offer the opportunity to hold one security that represents a diversified investment portfolio, but there are a few key differences:
- Trading - ETFs trade like stocks on the exchange and can be bought and sold throughout the day at market price. That’s not to say that the funds inside the ETF are traded daily—ETFs tend to be passively managed to replicate the performance of their underlying index. Mutual funds are bought and sold at the end of the day based on the fund’s net asset value (NAV). Portfolio managers actively buy and sell securities within the fund in an attempt to outpeform a given benchmark or investment objective. Which contributes to the next difference.
- Fees - ETFs generally have lower expense ratios than mutual funds, as they’re mostly passively managed, vs. Mutual Funds, which tend to be actively managed and may come with commissions and other fees. While mutual funds often come with higher management fees, there is no trading commission on mutual funds, unlike brokerage fees for ETF trades.
- Tax Efficiency - ETFs tend to be more tax efficient due to their unique structure and the way transactions are executed, while mutual funds may come with more capital gains taxes due to the fund’s internal trading activity.
Both allow you to focus your investments.
One benefit of both an ETF and a mutual fund is the ability to focus your investment in a certain sector—like tech, sustainability, or healthcare. Both allow you to invest in an industry you’re bullish on but on a broader set of companies, so you’re not responsible for picking individual stocks—leave that to the experts.
In Conclusion
If you’re debating between investing in a mutual fund or an ETF, be sure you understand what the fund holds (stocks, bonds, commodities, or a mix?) and the associated expense ratios or management fees. As always, if you have any questions, reach out to Range.
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