ETFs vs. Mutual Funds: Everything You Need to Know
mutual fund or ETF can do the hard work for you, and probably save you money. A mutual fund is a basket of securities—usually stocks, bonds or a combination of both—that you can buy from an investment company or through a workplace retirement plan like a 401(k). Typically you are allowed to buy or sell once a day.
Exchange-traded funds, or ETFs , are increasingly popular investment vehicles that closely resemble mutual funds but are bought and sold a different way. ETFs are traded throughout the day on an exchange, like the stocks they own, potentially giving you more flexibility. Both mutual funds and ETFs are overseen by a portfolio manager.
Mutual-fund managers may take the traditional “active" approach of trying to pick winning stocks that will outperform the rest of the stock market, or they may take a newer “index" approach, aiming merely to match market returns. While there are also some active ETFs, most ETFs are so-called index funds that take the newer approach. Either way, buying funds helps you avoid betting too much money on a single company.
And broadly speaking, you get more bang for your buck. It’s a big reason nearly half of all U.S. households own mutual funds or ETFs .
“You can really build a nicely, well-diversified portfolio using ETFs or mutual funds," says Misty Lynch, chief executive of Sound View Financial Advisors near Boston. “They can both build wealth." Here is how these two popular investment funds compare when it comes to structure, trading and costs. What is a mutual fund? A mutual fund pools money from investors to build a portfolio of assets.
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