Mutual Funds vs. ETFs
At first glance, ETFs have a lot in common with mutual funds. Both offer shares in a pool of investments designed to pursue a specific investment goal. And both manage costs and may offer some degree of diversification, depending on their investment objective. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
Structural Differences
Mutual funds accumulate a pool of money that is then invested to pursue the objectives stated in the fund’s prospectus. The resulting collection of stocks, bonds, and other securities is professionally managed by an investment company.
ETFs trade like stocks and are listed on stock exchanges and sold by broker-dealers.
Mutual funds, on the other hand, are not listed on stock exchanges and can be bought and sold through a variety of other channels – including financial professionals, brokerage firms, and directly from fund companies.
The price of an ETF is determined continuously throughout the day. It fluctuates based on investor interest in the security, and may trade at a “premium” or a “discount” to the underlying assets that comprise the ETF. Most mutual funds are priced at the end of the trading day. So, no matter when you buy a share during the trading day, its price will be determined when most U.S. stock exchanges typically close.
Tax Differences
Determining whether an ETF or a mutual fund is appropriate for your portfolio may require an in-depth knowledge of how both investments operate. In fact, you may benefit from including both investment tools in your portfolio.
Amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.
At a Glance
Mutual funds and exchange-traded funds have similarities – and many differences. The chart below gives a quick rundown.
1. Investopedia.com, 2021
2. The Standard & Poor’s 500 Composite Index is an unmanaged index that is generally considered representative of the U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index.
3. Investopedia.com, 2020
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