Exchange Traded Funds (ETFs) and Mutual Funds are two popular types of investment options available to investors. However, many investors wonder whether they should invest through an ETF or through a mutual fund. The answer is that it really depends on your particular circumstances and what your investment goals are since each type has advantages as well as disadvantages.
Exchange Traded Funds
An Exchange Traded Fund is a fund into which an investor invests along with other investors. Investors become shareholders and acquire shares in proportion to their investment. The fund usually tracks the performance of an index, a commodity such as oil or gold, bonds etc. An ETF trades on the stock exchange just like stocks do. But the risk is spread across several different asset classes unlike pure stock trading. It is relatively inexpensive to invest in ETFs since the fees are lower. Other advantages of ETFs include diversification, and the ability to buy and sell shares as desired. Since ETFs trade on the stock exchange, the value varies moment by moment as investors buy and sell shares throughout the day. Whenever profits are made, it is divided among the investors.
A mutual fund is a pool of funds that are contributed by several different investors. The aim of the fund is to outperform a benchmark such as an index. Unlike ETFs, mutual funds are not traded on the stock exchange. Therefore, they may only be redeemed once daily at a single price known as the Net Asset Value (NAV). A Portfolio manager usually oversees a mutual fund and charges a fee for this service. This fee makes it relatively expensive when compared to ETFs. An advantage of mutual funds is that you may invest with as little as $2500 and sometimes less. Diversification is also an advantage.