There are a number of differences between mutual funds and ETFs, although a lot of people would make note of the similarities which exist between the two. For example, both ETFs and mutual funds hold bonds and stocks (and sometimes even metals or other commodities), the amount of money that can be included in one particular holding, the amount of money that can be borrowed in relation to the size of the portfolio and the country-specific regulations which govern the activities of both mutual funds and ETFs.
That, however, is where all similarities end. What comes up next is a list of the many and utterly vast dissimilarities that exist between MFs and ETFs. So keep reading.
The first and foremost difference lies in the manner in which the two trading instruments operate. When one invests in a mutual fund, he/she is entering into a transaction with the company or entity that is responsible for carrying out the management of the funds. It’s done either directly or through a broker. All the purchases made are based on the net price of the security at which it closes for the day. You can also place your order after the market closes, in which case it will be evaluated at the price of the next day. And when it is time to sell your shares, the process plays out in a similar pattern, only in reverse.
However, people who invest in ETF don’t have to face similar conditions. One of the biggest advantages of trading ETFs is that they happen to trade on exchanges, like common stocks and shares. Because of this, one does not have to go through the usual predicaments of looking up a reliable fund manager. You would be able to buy and sell at any point of time when the trade is on, and at the spot price of the security or share concerned. And unlike mutual funds, one does not have to bear the constraints of a minimum holding period. This is relevant especially in case of international assets, where the asset’s price has not yet gone through upgradation so as to enable it to reflect new information.
There exists another big difference between ETFs and MFs. A whopping majority of ETFs track the index. Therefore, they make efforts to match the price movements of an index with their returns, such as the Standard and Poor 500. They do this by assembling a portfolio that is a close match for the contents of the index. On the other hand, mutual funds, while they can track indices very well, are managed in a completely active fashion; which would mean that the people who run them, would choose holdings in a fashion where the performance-judging index can be judged.
Another major difference is that ETFs can give the investor maximum bang for minimal bucks. In other words, these are immensely cost-effective and can give you greater returns in exchange for smaller premiums. ETFs which track indices usually have lower expenses in comparison to mutual funds which do the same. And ETFs are not usually managed in an active manner in the same way mutual funds are. And even if they are, they are cheaper by comparison.
These are, as one could assert, the chief differences which exist between Mutual Funds and ETFs. However, it should be remembered Mutual funds and ETFs are both quite open-ended. What this means is that the outstanding shared can be perfectly adjusted in accordance with supply and demand.
