ETFs Vs. Mutual Funds

With ETFs, you can trade more flexibly, as these products are traded intraday. Actively managed funds are typically more expensive than ETFs or index funds—in large part, to compensate management. So investors can buy only a few shares, which is a positive for an investing novice.

Both ETFS and mutual funds provide an easy way to invest in stocks and build a diversified investment portfolio. Like mutual funds, ETFs invest in a variety of companies. A comparable index mutual fund, the Vanguard 500 Investor Shares ( VFINX ), has an expense ratio that is more than three times as high.

This summary discusses only ETFs that are registered as open-end investment companies or unit investment trusts under the Investment Company Act of 1940 (the 1940 Act”). Greater Flexibility: Because ETFs are traded like stocks, you can do things with them you can't do with mutual funds, including writing options against them, shorting them and buying them on margin.

These are traded for an amount close to the original net asset value of the asset, during a trading day. Since active funds require more overhead and (theoretically) allow you to benefit from their managers' experience, they usually have higher fees. In exchange for providing convenience and investing expertise, fund managers levy fees, usually an annual percentage of the funds you invest.

Equity mutual funds are like a middle man between you and stocks: They pool investor money and invest it in a number of different companies. Liquidating a portfolio's mutual funds may increase risk, increase commissions and fees, and incur early capital gains taxes.

Therefore, you must have a brokerage account in order to buy and sell ETFs. To overcome this obstacle and attract more people to the market, several big-name brokers like Vanguard and Charles Schwab have announced commission-free ETF trading. As long as it's an appropriate investment, a stockbroker isn't obligated to give you the best investment in that category.

Mutual funds can often be purchased at NAV, or stripped of any loads , but many (they are often sold by an intermediary) have commissions and loads associated with them, some of which run as high as individual retirement account 8.5%. ETF purchases are free of broker loads. Investing in mutual funds allows you to gain exposure to a large number of companies, which can increase your portfolio's diversification and exposure to different markets and sectors.

Generally, ETFs have lower fees and higher daily liquidity compared to mutual fund shares. Mutual funds and exchange-traded funds are sold only by prospectus. With an actively managed mutual fund, a fund manager makes choices about how to allocate fund assets as opposed to assets being purchased simply to track an index.

Mutual Funds have varying operating expenses. Mutual funds are either open-ended, with no limit on the number of shares that can be sold, or closed-end, with a fixed number of shares. Easy diversification, as each fund owns small pieces of many investments. For example, suppose you want to invest $5,000 in an ETF at a final price of $45 a share.

Most Mutual Funds have a minimum expense specified. There are exceptions—and investors should always examine the relative costs of ETFs and mutual funds that track the same indexes. ETFs are index funds, but they're index funds with a twist: They're traded throughout the day like stocks, with their prices based on supply and demand.