ETFs vs. Mutual Funds
Q: We’re interested in investing our money for the long-term and would like to have our investments managed by a professional. We’ve been considering ETFs and mutual funds, but they appear to be the same thing. What’s the difference?
A: There are many similarities and differences found within mutual funds and exchange-traded funds. Understanding the details can help the decision-making process. While the differences aren’t dramatic, they can be important.
Consider these details:
- Most mutual funds are actively managed. If professional management of your money is important, mutual funds fit the bill. ETFs seek to match the performance of a specific financial index. Index mutual funds are similar to ETFs in this regard.
- They are priced differently. Mutual funds are priced by the net asset value (NAV). This is simply the total holdings of the mutual fund minus any liabilities, which is then divided by the number of outstanding fund shares. The NAV is recalculated each day.
- An ETF is priced like a stock. The price reflects whatever investors are willing to pay for a share. The price continuously changes throughout the day. The Net Asset Value of an ETF is required to be posted at the end of each day. This doesn’t necessarily match the price, however.
- Both permit an investor to own a wide variety of stocks and securities without a large investment. If you don’t have the financial resources to purchase hundreds of stocks, bonds, and other financial instruments, both types of funds provide a means to do this.
- They are bought and sold differently. ETFs are traded like a stock and can be purchased anytime the market is open. Mutual funds can only be purchased at the end of the day after the NAV has been determined.
- Many mutual funds have sales loads. You might have to pay a few percentage points in fees when you purchase your shares. You will only incur brokerage fees with ETFs.
Managed mutual funds will tend to have higher fees and expenses, but the opportunity exists to beat the market. However, it’s important to note that very few mutual funds routinely beat the market. Take these facts into account and make a decision that best supports your financial goals.