Comparing Mutual Funds With Exchange-Traded Funds

Mutual Funds and ETFs (exchange-traded funds) may be attractive to investors because they commonly offer diversification and professional management for a comparatively low cost compared to some other types of investments. The range of types of funds available to investors allow access to a range of investment strategies and philosophies. Mutual funds and ETFs are similar in many ways, but it is important to note their differences as well.

An investment fund is a portfolio of investments that many investors put their money into together. This may decrease exposure to risk and can allow both beginners and more experience investors to tap into a diverse investment. Mutual funds and ETFs represent a range of investment styles and strategies.

Mutual funds date back as far in history as 1924. ETFs, however, have only been in existence since 1993. Despite being a more recent investment product, ETFs are gaining in popularity.

What Is The Difference: ETF and Mutual Fund

Perhaps the biggest difference between an exchange-traded fund and a mutual fund is in the way they are traded.

Mutual funds are purchased either from a broker or from the mutual fund company. The net asset value of the fund is calculated as the market closes each day, and all of the buy or sell orders that have been placed throughout the day will execute at this time.  

ETFs are traded through an exchange, as the name suggests. An ETF calculates its NAV at the end of the trading day similarly to a mutual fund, but investors  can purchase shares at market value, throughout the day.  This is an important distinction from a mutual fund.

Expenses

When it comes to fees, one of the biggest factors in comparing expense ratios is whether the investment is passively or actively managed. Similarly, both types of funds represent such a wide range of characteristics that it is impossible to say that one has a typically larger expense ratio than the other.

Rather, each type of fund has certain common fees that investors should keep an eye on. For example, ETF investors are sometimes responsible for brokerage fees, while mutual funds are may or may not have a sales charge associated with the purchase. Account fees, redemptions fees, commissions, and more may all be be part of the costs associated with a mutual fund. 

The fees and expense ratio of each individual fund will be located in the prospectus. While both mutual funds and ETFs may have y lower fees that other types of investments, small fees may have large compounding effects on the total investment return. This makes it important to analyze each investment to ascertain the total cost of owning it prior to making a purchase.

Similar But Not The Same

ETFs and mutual funds have some marked differences. It is important, as an investor, to understand the investments and financial products you purchase. At the same time, both ETFs and mutual funds are available to represent the full range of conservative to aggressive investment strategies. No matter your investment strategy, investing in a  mutual fund or an ETF  may provide a diverse portfolio.