ETF vs Mutual Fund – Difference Between ETF and Mutual Fund
On the floors of stock exchanges, there is a wide array of investment options: Stocks or bond. They also have to choose between investing on the home turf or internationally. All these are options that are opened to them. While they have to deal with making a pick from a wide range of investment options, they tend to relegate ETF and mutual fund to the background. Now, do you know the difference between ETF and mutual funds? ETF is a fund on which track usually some specific indexes and it isn’t managed actively. While mutual fund is actively managed and created to give more profit for the investors with buying assets through the fund.
Well, you may not know the disparity because you are a newbie in the investment space. But not to worry as this guide will help you make sense of it all. In keeping with the usual tradition, we will start the piece with the definitions, discuss the difference between ETF and mutual fund with a table, and finally conclude the article.
Definition of ETF Fund – So What Is ETF Fund?
ETF is an acronym for “exchange traded fund,” and is defined as a collection of a number of stocks that can be traded in the exchange market. It offers investors a way of building and diversifying their portfolios, and like any other investment, it has its risks and rewards.
So, if John invested in twelve different companies, he is issued stocks in each of the companies as proof that he is a part-owner. Then, John decides to liquify his investments.
He can go ahead and sell them separately, going through the selling process twelve times, or he can sell them collectively as one, going through the selling process just once. Putting all of his stocks in one basket to be sold as one, even though there are twelve different company stocks there, is what exchange traded fund is all about.
Typically, this type of investment is offered by a fund provider (some form of investment specialist). He designs an underlying asset to track the performance of the pooled funds. Anyone who decides to invest in this fund would own a portion of the ETF but not the underlying assets in the fund.
Definition of Mutual Fund – So What Is Mutual Fund?
A mutual fund is defined as any investment opportunity where investors pool their money to purchase some securities and create a high-level diversified portfolio. Comparing ETF vs mutual fund, one can see how these two are similar. They both pool investors’ money into a collection of stock, and each investor gets to enjoy a financial portfolio that is quite diversified.
So, what is so unique about mutual funds? First, they are actively managed by an expert manager whose job is to try to grow the funds through buying and selling strategically. This makes it ideal for investors who are looking for short-term benefits. Naturally, a lot of people prefer this, which accounts for it being more popular than ETF which is passively managed and mostly offers long-term benefits.
For each of these types of investments, it is expected that the investors pay a certain amount of money known as the expense ratio each year. This amount is a percentage of the cost of investment. Mutual funds are typically quite expensive, probably because it is in high demand.
Another interesting mutual fund vs ETF difference can be seen in the way they are traded. The latter are traded throughout the day while the former can be traded only at the end of the day.
What Is the Main Difference Between ETF and Mutual Fund?
|Basis of Comparison||ETF||Mutual Fund|
|Meaning||This is an investment tool used for tracking the performances of indexes||This is an investment program that enables investors to pool their resources together to purchase securities|
|Trading||This is traded intra-day||This is traded at the end of the day|
|Stock order||Allows relevant players to make stock order||Participants cannot make stock order|
|Fees||While investors contribute to keep the program running, the expense is minimal. So, this is more cost-effective||The expense in this option is higher. Well, the reason is that fund managers charge investors for their (fund managers’) time and expertise|
|Investing flexibility||This offers users some investing flexibility as they have lots of options to plough their money in||This is not flexible|
|Fund Transfer||There is ease of transfer. As a result, many experts consider this a portable investment, which has a good number of advantages.||This results in complications when an investor transfers portfolio to another company or it is to be liquidated|
No doubt, the table above gave a clear-cut difference between mutual fund and ETF. Well, the next step will be to conclude this guide.
So What’s the Difference Between ETF and Mutual Fund? – Conclusion
Are you still at sixes and sevens about the better option here? The truth is of the matter is, there is no better option. Yes, everything depends on your choice. Going forward, you would recall that our goal is to help you spot the disparity.
So far, we believe that we have done a good job at that. So, if you wish to know more about the difference between mutual funds and ETFs, we advise that you consult a stock broker. Meanwhile, as a newbie, we all welcome you to the fulfilling investment world!