Mutual Funds Vs ETFs

Mutual funds are generally bought directly from investment companies instead of from other investors on an exchange. Unlike ETFs, they don’t have trading commissions, but they do carry an expense ratio and potentially other sales fees.

• Both mutual funds and ETFs offer investors pooled investment product options.
• Mutual funds have more complex structuring than ETFs with varying share classes and fees.
• ETFs typically appeal to investors because they track market indexes, mutual funds appeal because they offer a wide selection of actively managed funds.
• ETFs actively trade throughout the trading day while mutual fund trades close at the end of the trading day.
• Mutual funds are actively managed, and ETFs are passively managed investment options.

Mutual funds will have a higher expense fee than an ETF. Mutual funds also let you invest say $100 a month into and buy $100 worth of the mutual fund, if share price is $80 you bought 1.25 shares. Whereas, an ETF if you have $100 and the price is $80, you will buy 1 share and have $20 sitting in cash. Also, mutual funds by default reinvest in themselves the dividend disbursement unless you choose otherwise. An ETF will just put the dividend into your account as cash unless you tell your broker to DRIP the dividends.

When you buy a mutual fund, you put your order in and it buys the shares at market close, same if you sell. An ETF you buy and sell and it happens immediately. Mutual funds can have a minimum holding period or be charged a penalty. Could be 3 months or more. Some mutual funds also have a minimum investment for example $500 or $1000 to initially get in the mutual fund. If you withdrawal they charge a fee unless you hold longer than the time frame.

Also, mutual funds are often actively managed. This means a Fund Manager buys and sells stocks based on a thesis. In a passive ETF, you’re just getting market exposure based on certain parameters. This includes stocks that you may like, and stocks that you may not. Finally, by buying the market, you’re getting full exposure to the upside and gains, but also full exposure to the downside risk. If the market falls 20%+, then your ETF will fall a corresponding amount. Plus, the liquidity of the ETF (ability to move in and out of the market) will likely decrease as liquidity tends to fall when the market falls.