Money Matters Etfs Vs Mutual Funds
Q: We’re interested in investing our money for the long-term and would like to have our investments managed by a professional. We’ve been considering ETFs and mutual funds, but they appear to be the same thing. What’s the difference?
A: There are many similarities and differences found within mutual funds and exchange-traded funds. Understanding the details can help the decision-making process. While the differences aren’t dramatic, they can be important.
Consider these details:
1. Fund managers actively manage most funds. If professional management of your money is important, funds fit the bill. ETFs seek to match the performance of a specific financial index. Index mutual funds are similar to ETFs in this regard.
2. The pricing of each of them differs. The pricing of funds is based on the net asset value (NAV). To calculate the net asset value (NAV) of a mutual fund, one simply subtracts any liabilities from the total holdings of the fund, and then divides the result by the number of outstanding fund shares. The fund managers recalculate the NAV of mutual funds each day.
✓ An ETF is priced like a stock. The price reflects whatever investors are willing to pay for a share. The price continuously changes throughout the day. The Net Asset Value of an ETF is required to be posted at the end of each day. This doesn’t necessarily match the price, however.
3. Both permit an investor to own a wide variety of stocks and securities without a large investment. If you don’t have the financial resources to purchase hundreds of stocks, bonds, and other financial instruments, both types of funds provide a means to do this.
4. People buy and sell them differently. Investors can trade ETFs like stocks and purchase them anytime the market is open. The determination of the NAV of mutual funds allows investors to purchase them only at the end of the day.
5. Many mutual funds have sales loads. You might have to pay a few percentage points in fees when you purchase your shares. You will only incur brokerage fees with ETFs.
Managed funds will tend to have higher fees and expenses, but the opportunity exists to beat the market. However, it’s important to note that very few mutual funds routinely beat the market. Take these facts into account and make a decision that best supports your financial goal.