Difference Between ETF and Mutual Fund

Difference Between ETF and Mutual Fund

On the floors of stock exchanges, there is a wide array of investment options: Stocks or bond. They also have to choose between investing on the home turf or internationally. All these are options that are opened to them. While they have to deal with making a pick from a wide range of investment options, they tend to relegate ETF and mutual fund to the background. Now, do you know the difference between ETF and mutual funds?

Well, you may not know the disparity because you are a newbie in the investment space. But not to worry as this guide will help you make sense of it all. In keeping with the usual tradition, we will start the piece with the definitions, discuss the difference between ETF and mutual fund with a table, and finally conclude the article.

Definition of ETF Fund

Basically, Exchange-traded Fund (ETF) is the set of investment vehicles that allow investors to purchase and trade a wide spectrum of securities. A close look at the investment vehicles shows that they have similar features as index funds, which are funds that track the performances of a particular index.  

Basically, it has many investments, such as bonds, stocks, and commodities – both in single or combined forms. Given that it is marketable, it means that the security tracker has price tags, which allow trading experts to either buy or sell them off. In summary, the common features of ETF include the following:

  • It can be traded on floor of the traditional stock exchange
  • The prices are unstable as it is determined by market forces
  • Well, it contains one or more of stock, bond, commodities, holdings, etc.
  • It is traded in daytime.

A typical example is SPDR S&P 500 ETF (SPY), which is used for tracking S&P 500 Index.

Although we have yet to identify the difference between ETF and mutual funds, we will have to define the latter.

Definition of Mutual Fund  

This is an investor-financed program that seeks to buy certain securities. Basically, the nature of players at this level could be retail or institutional. Interested people pool their resources together to pursue this option because it has lots of benefits. Although it has many benefits, this program also has its attendant demerits.

Some of its advantages include:

  • High level of diversification
  • Economies of scale
  • Liquidity provision
  • There is high level of confidence
  • There is government regulation
  • Managed by professionals.

Well, the demerit is that the people involved pay expenses/fees, and the income is not really predictable. That said, the principal plyerrs in this program often define them as money market funds, stock or equity funds, hybrid funds, and a list of other nomenclatures.

 So fat, so good, we have been able to identify the ETF and mutual fund difference. Well, that’s not all as we will represent the information in a tabular form.

ETF vs Mutual Fund Comparison Table

Basis of Comparison ETF Mutual Fund 
Meaning This is an investment tool used for tracking the performances of indexes This is an investment program that enables investors to pool their resources together to purchase securities
Trading This is traded intra-day This is traded at the end of the day
Stock order Allows relevant players to make stock order Participants cannot make stock order
Fees While investors contribute to keep the program running, the expense is minimal. So, this is more cost-effective The expense in this option is higher. Well, the reason is that fund managers charge investors for their (fund managers’) time and expertise
Investing flexibility This offers users some investing flexibility as they have lots of options to plough their money in This is not flexible
Fund Transfer There is ease of transfer. As a result, many experts consider this a portable investment, which has a good number of advantages. This results in complications when an investor transfers portfolio to another company or it is to be liquidated

No doubt, the table above gave a clear-cut difference between mutual fund and ETF. Well, the next step will be to conclude this guide.

Conclusion of the Main Difference Between ETF vs Mutual Fund

Are you still at sixes and sevens about the better option here? The truth is of the matter is, there is no better option. Yes, everything depends on your choice. Going forward, you would recall that our goal is to help you spot the disparity.

So far, we believe that we have done a good job at that. So, if you wish to know more about the difference between mutual funds and ETFs, we advise that you consult a stock broker. Meanwhile, as a newbie, we all welcome you to the fulfilling investment world!