ETFs Vs Mutual Funds: 4 differences you need to know
In this article, we will explore the ETFs Vs mutual funds question. If you are not directly investing in stocks, you can invest in the US markets through ETFs and Mutual Funds. To know how to invest through mutual funds and ETFs in the US stock markets, click here.
ETFs and mutual funds are broadly similar as they pool investments and spread it across a collection of different securities. This helps investors diversify their portfolio easily without having to purchase or manage different individual assets like stocks or other securities. However, ETFs and mutual funds are not the same. It is important to note that we are comparing ETFs and actively managed mutual funds here and not index funds. Let us now look at how ETFs and mutual funds are different.Â
1. How they are managed
Mutual funds are managed by professional fund managers. They apply their investing expertise to buy and sell stocks in such a manner that it beats the market. This often means higher costs for investors via higher expense ratios. On the other hand, ETFs are passively managed funds and track an index, sector, commodity, or other assets. For example, the Invesco NASDAQ 100 ETF seeks to track the investment results (before fees and expenses) of the NASDAQ-100 index.
2. How they are traded
Another difference between ETFs and mutual funds is the way they are traded. Trading ETF is very similar to trading stocks. You can buy and sell anytime the market is open and the prices are based on supply and demand. On the other hand, mutual fund NAVs are updated only once a day and one can buy/sell only by placing a request with the fund house.
3. The cost of investing
Another thing to consider in the ETFs vs mutual fund discussion, is the cost of investing. ETFs can be an easy way to gain exposure to many companies without having to pay high trading fees. If an investor wants to invest in the top 500 US companies, he/she can buy a share of the SPDR S&P 500 trust, an ETF for the S&P 500 index, instead of buying shares of 500 different companies and paying commission 500 times. Also, ETFs have low expense ratios as compared to an actively managed fund, where the investor pays for the expertise of the fund manager. This means that more of your money works for you and earns you greater returns.
4. ETFs give you more control
ETFs allow you to have more control over the price you trade, as compared to mutual funds. For example, you can place stop orders or limit orders to minimize your losses or maximize your profits, which you cannot place with mutual funds. You can also place a market order or trade at the best available price. In the case of mutual funds, you can get only one price that is calculated at the end of the day, irrespective of when you place an order.
As we have seen, even though mutual funds and ETFs are similar, ETFs are more cost-efficient and let you have more control over your investments.