ETFs and a mutual funds are similar investment tools because of the way that they run things. If you are thinking about investing in an ETF, mutual fund advertisements might try to sway you their way. There are some key differences that make them unique investment vehicles.

Mutual Funds

Mutual funds are the more commercialized version of the two. With mutual funds, you have a sales force that is in charge of driving up interest in the fund. They advertise and talk to investment managers in an attempt to get people to invest their money in the fund. 

Once they have accumulated enough money to get started, they start picking stocks, bonds, and other investments to go in the portfolio. This is usually done by several fund managers that have experience in picking stocks. Some are good at what they do, others are not so great. If the mutual fund is an index fund, they try to keep the fund as close to a particular index as possible. This work is usually done by a computer program that analyzes the market instead of allowing fund managers to do this part. 

Investors in mutual funds choose these products because of their diversification. A good fund will represent several aspects of the market and keep everything balanced nicely. They are low-risk, low-return investment vehicles. The performance depends a lot on the strength of the management team that is picking the investments for the group. When you buy into a mutual fund, you do so with shares in the fund. These shares can only be traded at the end of the trading day. Therefore, your options are somewhat limited as far as buying and selling these. 

ETF

An ETF is very similar to a mutual fund with some key differences. With a mutual fund, the investments are started by a group that has accumulated many investors. They promote the fund greatly and charge more for running it. On the other hand, an ETF is established by a big investment group that already owns the shares that they need. They simply choose the portion of the shares that they need to get close to a particular index and make it a fund.

In return for the shares that they give up, they get what are called creation units. These creation units are like shares in the ETF itself. This is what is freely traded in the markets by investors. With ETF's, you have more flexible options. You can trade them on the stock market just like stocks. You can sell short and buy long with these investments. You can hedge and even take options out on them.  You do not have to wait until the end of the trading day to trade ETF's. They are much more flexible than mutual funds and provide similar returns on your investment.

blog comments powered by Disqus
Scottrade