Mutual Fund vs. Exchange-Traded Fund

If you are looking to invest for your future and have begun the process of researching strategies for this, you have undoubtedly run across the concept of diversification. As such, you probably know that it’s wise to spread your investments out across different types of elections to both limit your potential for large losses and to gain access to more opportunities for growth. But how do you achieve diversification, short of running yourself ragged researching hundreds of different investment options? For many years, the answer to that question was simple: invest your money in a mutual fund. But in the past few decades another strong alternative has emerged in the form of exchange-traded funds, often called ETFs.

Each of these fund choices gives you diversity through building a basket of investments your money is put toward. However, there are some key difference you should be aware of.

  Mutual Funds ETFs
Bundle securities to offer diversified portfolios Yes Yes
Trade throughout the day No (only at end of day) Yes
Higher operating expenses Generally yes Generally no
Investment minimums Yes No
Commission paid for purchasing the fund (sales load) Possibly No
Relatively tax-efficient No Yes
Trades trigger brokerage commissions No Yes
Appropriate for active trading or dollar cost averaging Yes No
Passively managed (indexed) Not usually Usually

Depending on your trading style and your objectives, either choice could be right for you. Consult with a tax profession and a certified financial planner for more information on the best choice for your situation and goals.

© 2013 BALANCE Close Window