An Overview of Exchange-Traded Funds (ETFs) Vs. Mutual Funds
Most people are stuck in a ‘work, earn, and spend’ rut. And it takes up a large chunk of their lives.
By the time those individuals retire, they only have enough to make ends meet. This means there’s no space for fulfilling dreams, like going on a world tour or starting your own bake-off show (hey, no judgment from us). Fortunately, there’s a way to retire with enough money for daily expenses and dream chasing. All you have to do is add another word to the ‘work, earn, and spend’ strategy – invest.
Two of the most common investment strategies are exchange-traded funds (ETFs) and mutual funds.
Both have similarities and differences, and you must know about them before investing in either.
So, in this blog, we’ll discuss:
- The similarities and differences between exchange-traded funds vs. mutual funds
- Exchange-traded funds pros and cons
What Are ETFs?
Exchange-traded fund characteristics refer to a collection (commonly known as a basket in the industry) of investments, like bonds or securities. Just like a standard stock, ETFs are traded on a stock exchange.
Three primary reasons investors prefer exchange-traded fund providers over others include:
- Low price
- Easy to trade
- Tax efficiency
How Many Types of ETFs Are There?
There are six types of ETFs, each with its advantages and disadvantages. But that’s a topic for another day. For now, it’s enough to know their names and how they function.
- Equity Stocks are a compilation of the best-performing stocks of companies from a specific industry. They’re suitable for those investors who know that a certain sector has potential but are unaware which company’s stocks could yield high profit.
- Bond ETFs, also known as Fixed Income ETFs, are a collection of investments with varying prices and maturity dates, like debentures or government bonds. Since exchange-traded fund bonds are low-risk, they are preferred over Equity Stocks.
- While excellent for diversifying your investment portfolio, Commodity Funds can be challenging to access. And that’s because literal commodities are involved in this method, like oil, gold, or even wheat. This doesn’t mean you’ll physically own these commodities but trade in their prices.
- In Currency ETFs, you invest in a single currency or multiple currencies. It’s suitable for those seeking exposure in the foreign exchange market. Investors who think a particular currency will rise invest in Currency ETFs.
- Evident from the name itself, Real Estate ETFs are all about investing in real estate investment trust (REIT). An excellent source of earning income post-retirement or even before, Real Estate ETFs can help you get exposure to the real estate industry.
- The last type, Specialty ETFs, have high risk as well as the potential to yield greater profits. They are further divided into two categories – inverse and leveraged. The former goes up when the target index goes down, while the latter aims to maximize returns by borrowing money, called leverage.
What Are Mutual Funds?
Similar to ETFs, mutual funds refer to ‘pooling’ money from investors and investing it in different stocks or bonds. The average rate of return on Mutual Funds is 11.54%.
Types of Mutual Funds
Most Fidelity Mutual Funds fall into either of the following four categories:
- Money Market Funds are invested in commercial papers, government bonds, and others. They are short-term and low-risk.
- Bond Funds are high-risk mutual funds that generate fixed income. Since there are multiple types of Bond Funds, the risks and profits can also vary by a mile.
- Equity Funds or Stock Funds invest in company stocks. They are also divided into multiple types, like growth stocks, income stocks, value stocks, and many more.
- Finally, you have target-date funds, which aren’t a new type but a mixture of different mutual funds.
Now that we’ve discussed exchange-traded funds vs. mutual funds (ETF vs. MF) and their types in detail, let’s make an ETFs and Mutual Funds comparison.
Similarities Between ETFs and Mutual Funds
- Both are investment vehicles where an individual or a company pools money from an investor and invests it in securities, bonds, and stocks.
- Both methods are comparatively less risky than individually investing in bonds, stocks, or securities.
- Both investment opportunities can help you get exposure to a specific industry, like real estate.
Differences Between ETFs and Mutual Funds
- ETFs are passively managed funds. This means they do not require a manager to control them. One of their examples includes Nasdaq 100. Liquid funds Mutual Funds, on the other hand, are run by professional managers.
- You can buy and sell ETFs anytime during the trading day, and their price can vary. But Mutual Funds can only be traded at the end of the day based on the price during that particular moment. And all investors will receive the same price, which is not the case with ETFs.
- ETFs do not require a minimum initial investment amount. You can buy them at the price of one share or the market price. It could be anywhere between $50 and $500. Mutual Funds have a flat dollar amount, and it’s got nothing to do with the fund’s share price.
- ETF investors must report their findings at the end of every trading day to the US Securities and Exchange Commission (SEC). Mutual Fund investors have to do it four times a year.
- To purchase ETFs, you’d have to pay a certain fee, depending on the amount set by your broker. But that’s not the case with Mutual Funds; instead, you can buy them directly from a company. And often, they’ll charge nothing.
Whether It’s Money, Time, Or Energy, Invest Wisely
Exchange-traded funds vs. mutual funds are not cut from the same cloth. Although they have a few similarities, the investment strategies also differ significantly. And you have to consider those differences if you want to make a decision worth your time, energy, and money.
That’s what our experts recommend too.
If you’d like to know more, connect with us right away. We’d be glad to help you steer in the right direction.
Frequently Asked Questions (FAQs)
Mutual Funds are more expensive than ETFs. The high price of Mutual Funds is associated with them being actively managed, whereas ETFs have no such requirements.
There’s no ‘yes or no’ answer to this question. Both investment securities have pros and cons. Therefore, it’s best to consult an expert, like American Made llc, so we can assess your financial situation and suggest solutions accordingly.
Mutual Funds have a few advantages that make them a reasonable option. For starters, since there are multiple types, you can diversify your portfolio. Secondly, you’d have less to deal with, considering professionals manage Mutual Funds. And lastly, it’s quite easy to buy them.