ETF Vs. Mutual Funds



When constructing an investment portfolio, you'll probably include a variety of stocks and bonds among the securities you purchase. Because ETFs are traded on the exchange, there is always an ask price (buyers get this price) and a bid price (sellers get this price).

Exchange Traded Funds track an index, i.e., it tries to match the price movements and returns indicated in an index by assembling a portfolio which is similar to the index constituents. From the perspective of ordinary investors, one of the biggest differences between mutual funds and ETFs is how they are purchased.

Exchange-traded funds have proliferated in the last five years, but have not yet received much attention in the academic literature. ETFs offer greater flexibility than mutual funds when it comes to trading. If appreciated stocks are sold to free up the cash for the investor, then the fund captures that capital gain, which is distributed to shareholders before year-end.

Combining the money of many investors, both types of funds invest according to a specific strategy. If an ETF shareholder wishes to redeem $50,000, the ETF doesn't sell any stock in the portfolio. Mutual funds often have a minimum starting contribution requirement, which may range from $1,000 to several hundred thousand dollars.

The additional supply of ETF shares reduces the market price per share, generally eliminating the premium over net asset value. Instead, they seek to achieve a stated investment objective by investing in a portfolio of stocks, bonds, and other assets. Both types of funds have tax ramifications; for example, you might have to pay annual taxes if a mutual fund distributes earnings or other payouts before the end of the year—even if you don't haven't sold any of your shares.

Most index funds and a small group of actively managed funds don't charge a load. Lack of flexibility: Since index mutual funds are designed to perform in lockstep with an index, they enjoy less flexibility than other asset classes. This is in contrast with traditional mutual funds, where everyone who trades on the same day gets the same price.

Smart beta exchange-traded funds (ETFs) have become increasingly popular over the past several years. Mutual funds have long been a mainstay of retirement investment accounts. ETFs are similar to index mutual funds in that they provide ownership of an underlying asset and divide ownership of those assets into shares.

For example, in rough markets, active managers can play defense by selling more speculative or risky assets and adding more conservative investments. ETFs also tend to be more tax-efficient than mutual funds due to their low turnover, which minimizes taxable capital gains distributions.

That's the job of investing experts who manage a mutual funds' investments. This reprint and the materials delivered with it should not be construed as an offer to sell or a solicitation of an offer to buy shares of any funds mentioned in this reprint. ETF or Exchange Traded Fund is an investment fund which mutual fund is traded on the stock exchange.

In 2016, the average expense ratio of index ETFs was just 0.23% compared with a 0.82% average expense ratio of actively managed mutual funds and a 0.27% expense ratio for index equity mutual funds, according to Investment Company Institute Many mutual funds include a variety of fees in their expense ratio, including fees to cover marketing and distribution costs.

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