What's the difference between an ETF and a mutual fund?

Question

I've read a lot of books on investing and it seems like all of them say the very same things about ETF's and mutual funds. What is the real difference between them?

Answer 1

Mutual funds are appropriate for some and the wrong investment for a increasingly growing number of people.

For me, I would NOT invest in mutual funds if it weren't for having a 401K.

Overall, Mutual funds are not good (once you're educated in investing) and many people should not invest in mutual funds unless you have to (like if it were a requirement in a 401K).

Here's why.

First of all, mutual funds exist to take average person's money.

Second, mutual funds seem to be "happy" just to do better than the S&P index, since that's often the gauge. A monkey, yes monkey, can usually outpick most mutual funds. Over 60% of the mutual funds out there can't even outperform the market (CNBC just reported the current # was 72%). That's VERY SAD!

Third, mutual funds have embedded management fees in their costs. Most of these mgmt fees are 0.5% to 2% annually. This is one of the reasons they can’t outperform the market; they take a cut out regardless of how well or poorly they do!

Fourth, most mutual funds exist not to earn you a lot of money, but are more interested in NOT "losing" you lots of money. That way you stay with them and they continue to collect their fees. Did they not highlight to you that they take this fee each and every year regardless of how poorly they do?

Fifth, mutual funds are not as liquid as one might think. If you're in mutual funds and a Bush talks in the morning and you call your broker to sell because the market is now tanking, the broker will gladly take your order, but the order will not be executed until the day is over and the negative impact is already priced into the fund.

Sixth, many mutual funds charge extra "fees" if you buy/sell their fund within a certain amount of time, meaning you must keep your money in the fund 90 days to 2 yrs before you're free from the fees (read the fine print on trying to get a withdrawal). These fees can be up to 3% or so of your money as well.

Seventh, mutual funds have to be in the market. So if the market is crashing or going down like it has between May and now, then the funds still have to be in the market and taking those losses too. With some practice, you can time your monies to avoid some of those losses (it'll take practice).

Convinced yet? Need more?

Eighth, mutual funds have to be pretty diversified and so if there are hot and cold sectors, they are probably in both the hot sectors and cold sectors. However, as an investor, you can buy into just the sectors you want, like metals, or housing, or energy, etc. or right now, Brokers/Dealers, Retail, and insurance!

Ninth, mutual funds are so big, they can only invest in certain companies. A small mutual fund with $10 billion in assets. 1% of that money is $100 million. How many companies are this big where $100 million investment isn't the whole company? Do you want to limit yourself to just those larger companies like Times Warner, Microsoft, home depot, Cisco, Ebay which have been sideways for years? I think not.

A better way would be to buy ETFs (exchange traded funds) or holders. These trade like stocks, so are very liquid, and do not have the high fees like the mutual funds. Further, you can buy/sell them as you wish. They represent sectors or indexes, so buying them gives you the same diversification as the sector/industry/index, but with much less overhead! Here is a site with some basic stuff on ETFs.

http://www.valuestockreports.com/021907.htm

See Amex.com (american stock exchange) or ishares.com, holders.com for more info as well.


You need to invest for yourself. If you can't, then sure, use mutual funds. But be aware of the shortcomings (and as you can see, there are many).

Let me know if you have further questions.

Best of luck!

Answer 2

ETFs and mutual funds are both investment vehicles that enable an investor to invest in bonds, stocks, etc.

In general, ETFs are passively managed and mutual funds can be both passively or actively managed. However, there is a trend towards more actively managed ETFs as they become a larger portion of the market.

Right now, the major differences are these:
1. You can trade ETFs as you would a stock. That is, you can buy and sell throughout the day. You can short an ETF. With mutual funds, you can only buy at the end of the day at NAV and you cannot short a mutual fund.
2. ETFs generally have lower expenses than mutual funds. Some mutual funds though are pretty close to the ETF expenses so the difference may be moot.
3. Mutual funds carry capital gains and losses in the funds themselves. So if a lot of investors sell out of the mutual fund and the fund incurs a lot of capital gains, the remaining shareholders pay. Same for losses except the remaining shareholders benefit. For ETFs, they swap out the stocks when a purchase or sell transaction is made. That means the person doing the transaction has to shoulder the burden of any capital gains and losses, not the remaining shareholders.

Answer 3

Good question. In many cases they are practically the same. ETFs trade just like a stock and I believe they are easier to trade because most are listed on the Amex so you can just pull up the ticker like a stock. Also, there's some ETFs that just track certain commodities so you can play something like gold without getting involved in the futures market. There's no mutual fund for that. But then there's GDX which is the ETF for the top gold miners which would be identical to a mutual fund. Another difference is sometimes mutual funds are managed (load or no-load) whereas ETFs are not (no fees ever). ETFs are newer and offer more flexibilities into the market at greater ease but in many cases the two are the same. I hope that explains it pretty clear.

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Answer 4

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Answer 5

ETFs are like mutual funds with the exception of being closed-end rather than open-end investments. Mutual funds keep adding shares as investors buy from the fund and net asset value is calculated by dividing the value of the fund by the number of shares outstanding.

In the case of ETFs, they are like stocks. Once they are released for trading, no more shares are created. The way to buy and sell is to find a seller or buyer. The value will increase and decrease depending on supply and demand.

They are similar in that ETFs and mutual funds build portfolios of stocks based on the goal of the fund (i.e., growth, income, value, etc.).

Ron, ChFC

Answer 6

Mutual Funds Questions And Answers

Answer 7

ETF are traded like stocks and can be sold during market hours. You must wait till the end of the trading day to sell or buy a mustual fund at net asset value. There is a little more to it than this but that is the basics.

Answer 8

Essentially there is no difference but there is an exception. Regular mutual funds can be purchased directly from the company while ETFs are purchased the same as stock as they are listed on an exchange, hence their reference name-ETF--Exchange Traded Fund

Answer 9

The major difference is ETFs can be bought and sold like stocks at any brokerage. The prices have a bid/ask range and change tic by tic. Many are also optionable.

Answer 10

difference etf mutual fund