The Difference Between ETFs and Mutual Funds

To reach financial freedom, a common hurdle is understanding financial and investing terminology. The language is odd and the concepts complex, making people doubt their abilities. In reality, this challenge is a manageable one; and with help from Young Money University, it can be a hurdle you can step over with ease!

To get started, we’ll cover two important terms to understand related to investing: Exchange-traded funds (ETFs) and mutual funds. Both are forms of pooled investing, giving investors the opportunity to build a diversified investing portfolio. As a result, both types of funds will have a large number of assets within their specific fund. 

We’ll provide you with more in-depth definitions and key attributes of each kind of fund and highlight their key difference, providing you with the information necessary to determine which is best for you and your investment goals. 

Exchange-traded funds (ETFs) 

An exchange-traded fund is a type of pooled investment, its naming coming from the fact that it’s traded on an exchange like stocks are. ETFs provide investors with the benefit of diversification, like mutual funds, while being easy to trade, like stocks. The prices of ETFs fluctuate throughout the day and can be bought and sold throughout the day, unlike mutual friends which can only be traded once a day. ETFs are passively managed, resulting in them having lower management fees and they also have lower transaction fees. 

Mutual funds 

A mutual fund is a type of pooled investment, giving investors the chance to have a diversified portfolio. Unlike ETFs, they trade once per day after the trading day has ended and have a set trading price. Mutual funds are divided into different categories, reflecting the different securities they invest in. They are structured to match, and maintain, the investment predetermined objectives (i.e. its prospectus). Mutual funds are actively managed, which results in them having management feels, and in some cases commissions, which can affect returns. The managers who operate the mutual fund allocate its assets and work to generate income for the fund investors. 

This management structure makes mutual funds more complex than ETFs. 

Differences Between ETFs and Mutual Funds

Now that we’ve provided definitions for and overviews of the two different funds, lets recap their differences in closer comparison:

• ETFs’ prices change throught the trading day vs. Mutual funds have a daily set price
• ETFs’ appeal comes from their tracking market indexes vs. Mutual funds’ appeal comes from their offer of a wide selection of actively managed funds. 
• ETFs can be actively traded through the day, being bought and sold like stocks are vs. Mutual funds are traded once a before the trading day ends. 
• ETFs are passively managed vs. Mutual funds are actively managed. 
• ETFs have a relatively simple structure and lower fees vs. Mutual funds have a more complex structure and various fees. 

Learn more about ETFs, mutual funds, and other must-know investing concepts with our “The Beginner’s Guide to Investing Jargon,” linked below! Download it for free and start reading so you can confidently start investing.