Investing in mutual funds and exchange-traded funds (ETFs) are two of the most popular ways for investors to diversify their portfolios and access a wide range of assets. While these two types of investments have similarities, there are also some important differences to consider.
The primary difference between mutual funds and ETFs is in their structure and how they are traded. A mutual fund is a type of professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds are managed by a portfolio manager who selects the investments within the fund, and investors can purchase shares of the fund directly from the fund company.
ETFs, on the other hand, are traded on the stock exchange just like stocks. ETFs are passively-managed funds that are designed to track the performance of a benchmark index such as the S&P 500. ETFs can also hold a variety of different assets, including stocks, bonds, commodities, and currencies.
Another major difference between mutual funds and ETFs is in their fees. Mutual funds typically charge a management fee, which is an annual fee that covers the cost of managing the fund. ETFs generally have lower fees than mutual funds because they are passively-managed and do not require the same level of oversight.
Mutual funds and ETFs also differ in their liquidity. Mutual funds can be bought and sold directly from the fund company, but ETFs must be bought and sold on the stock exchange. This means that ETFs are more liquid than mutual funds and can be traded more quickly and easily.
While mutual funds and ETFs share some similarities, there are also some important differences to consider when deciding which type of investment is right for you. Mutual funds are actively managed and can be bought and sold directly from the fund company, while ETFs are passively-managed and must be bought and sold on the stock exchange. Mutual funds typically have higher fees than ETFs, and ETFs are more liquid than mutual funds.