Written by: Sam Clement, Portfolio Manager
Mutual Funds and ETF’s are actually very similar; however, they have a few distinct differences that may make one better than the other for certain investors. Both Mutual Funds and ETFs which stand for exchange traded funds hold a portfolio of more than one individual asset. This can include things such as stocks, bonds, and event things like gold, silver, or other commodities. You can even find mutual funds and ETFs with almost identical basket of goods. That leads people to ask, “well what really is the difference then?” The overarching difference between the two is how they are traded and the implications from that.
Mutual Funds are traded at the end of the day, meaning everyone who purchases it on a certain day, receives the share at the same price. This price is determined based on the value of the total assets in the basket of securities in the fund, for that day. However, this does not mean that a mutual fund is not impacted by demand like a normal security is. As a mutual fund receives more demand, and more cash, that money is then put to work in the fund. This means that the total value of the assets in the fund goes up, and therefore the price goes up as well. The daily price change of a mutual fun does remove a few options for some investors. This means you cannot day trade a mutual fund and also, there are no options contract on a mutual fund.
The second major difference for a mutual fund is that it is common for them to be actively managed. This means the fund is not just tracking some predetermined benchmark, instead the fund itself has investment managers who are trading within the fund to ideally outperform their benchmark. With this comes higher fees, that some might not be aware of.
As the name suggests, an ETF or exchange traded fund is trade on an exchange such as the New York Stock Exchange. That means for all intents and purposes it will trade like an individual stock will. An ETF can be purchased at any time during trading hours, and the intraday demand for it will move the price up and down immediately, compared to the mutual fund where the price change will be once a day. This means a few things. First off, because of how it is traded, investors can buy and sell options contracts on the ETF, basically making bets on the future price. Secondly, since an ETF is traded like a stock, it can be both day-traded, and an investor can short the ETF, or bet on the price to go down.
Even with these differences, both Mutual Funds and ETFs are good vehicles for an investor to easily diversify their investments. The main question one must ask when deciding is what their goal for that investment is and what success looks like. Once that question is answered the choice between the two should be clearer.