- January 26, 2018
- Posted by: fortunatetrader
- Category: Market
What’s the difference between a Mutual Fund, an Index Fund and an Exchange-Traded Fund?
It’s good to know the difference between them but it seems fair to first go into what is what.
An easy way to think about it is this:
“Exchange-traded funds, or ETFs, are a subset of index funds; and index funds are a subset of mutual funds.” – Gary.
A mutual fund is:
The term “mutual funds” typically refers to actively managed funds that uses money from many investors to pool and invest in a portfolio of stocks, bonds, real estate or other types of investment. Each investor in the fund earns a return from a slice of the total pie.
The mutual fund employs stock pickers with the goal of beating the market’s performance.
An index fund is:
An index fund is a type of mutual fund that tracks the components of a market index. Essentially it shadows the broad market like the S&P 500 instead of picking different stocks that a portfolio manager thinks will perform well.
An exchange-traded fund is:
ETFs, on the other hand, aren’t sold directly by fund companies. Which means that they’re a whole lot friendlier for the small-investor. They are listed on an exchange, and you must have a brokerage account to buy and sell those shares, which means they can be bought and sold throughout the trading day.
Although index funds and ETFs charge smaller fees than active mutual funds, all things considered, ETFs generally have lower annual fees than index funds;
“Ok, so which one to take.” It depends on the time that you have.
If you are a baby boomer they might not be your best options.
Mutual funds and Index funds tend to have a better performance on the long run; not on a 1 to 5 years period.
It is tempting to go with the ETFs but Exchange-traded funds might become illiquid if fear starts to build up in the index that it’s tracking.
You can move in and out of an ETF easily unless the price starts to drop significantly.
Mutual funds tend to have higher fees than index funds but, mutual funds basically do the same thing that an index does. Both diversify your portfolio across hundreds of stocks. The major difference is that an index tracks a very specific index.
For example, you could buy the Vanguard S&P500, which is essentially a shadow of the broad market S&P 500.
– Make It Happen –