- Exchange traded funds--ETFs and mutual funds are both types of investment companies that pool investor assets to buy securities. Investors own shares in the funds and participate in the value of the funds' portfolios and receive dividend if the portfolios earning interest and/or dividends. A major difference is that investors buy and redeem mutual fund shares directly from the fund company and ETF shares are bought and sold on the stock exchanges.
- All ETFs are based on stock or bond indexes or specific asset prices. The portfolio of an ETF is not actively managed for superior returns. The ETF will own the same securities as the specific index or asset and managed to reflect the value of the index or asset. Mutual funds are available as both index funds and actively managed funds. Index mutual funds hold the same securities as specific stock indexes. The major stock indexes are tracked by both ETFs and mutual funds. Actively managed mutual funds have portfolio managers that actively buy and sell investments for their fund to attempt to provide superior investment returns to the fund shareholders.
- Mutual funds are primarily invested in stock, bonds or a combination of stocks and bonds. According to the Investment Company Institute, there are over 4,500 stock funds, 1,800 bond funds and almost 500 hybrid funds. Mutual fund investors can find funds that fit their investment goals and objectives. ETFs are divided into funds that follow broad market stock or bond indexes and funds that are focused on specific market sectors or assets. ETFs allow investors to invest in trending sectors like energy, consumer goods, precious metals, foreign stock markets and currencies.
- A significant difference between mutual funds and ETFs is share purchase and price timing. Mutual fund share prices are set once a day after the markets close. All buy and redemption orders received during the day are then filled at the price calculated at the end of the day. ETF shares trade through out the market day and the share prices fluctuate to reflect the value changes of the tracked asset or index. When investors buy or sell ETF shares, they know almost immediately the price they received for their trade.
- Mutual funds are a good selection for investors who want long-term investments in which their dividends can be automatically reinvested and they can made periodic additional investments into their accounts. Mutual fund investors can choose low cost index funds or actively managed funds. ETFs are appropriate for investors who want to do short-term trading and jump from one trending sector to another as well as long term investments. ETFs also allow investment in non-stock or bond asset classes like precious metals, crude oil and natural gas and foreign currencies. ETF investing requires the investor open up a brokerage account and pay brokerage commissions on all trades.
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