Difference Between Mutual Funds and ETFs

Published on 06-May-2023

Feature	Mutual Funds	ETFs
Definition	A type of investment vehicle that pools money from multiple investors to invest in a variety of assets	A type of investment vehicle that tracks an index, commodity, or other asset and trades on an exchange like a stock
Ownership	Shareholders own a portion of the mutual fund, with the fund manager making investment decisions	Shareholders own a portion of the ETF, with the fund tracking an underlying asset or index
Investment strategy	May have a specific investment strategy, such as growth or value investing	Typically tracks an index or asset, with no specific investment strategy
Diversification	Can provide diversification across a range of assets, with the fund manager making investment decisions	Can provide diversification by tracking an index or asset
Liquidity	Can be bought and sold at the end of the trading day based on the net asset value (NAV)	Can be bought and sold throughout the trading day like a stock
Trading	Can only be bought and sold at the NAV price at the end of the trading day	Can be bought and sold throughout the trading day at market prices
Fees	Can have higher fees, including sales loads and expense ratios	Typically have lower fees, with no sales loads and lower expense ratios
Transparency	Must disclose their holdings regularly, typically on a quarterly basis	Must disclose their holdings daily
Minimum investment	May require a minimum investment, often ranging from a few hundred to several thousand dollars	Can be bought and sold in any amount, with no minimum investment required
Tax implications	May generate capital gains and income taxes for shareholders when assets are sold by the fund manager	May generate capital gains and income taxes for shareholders when shares are sold by the investor
Investment style	May be actively managed or passively managed	Typically passively managed
Active management	Involves a fund manager making investment decisions based on market analysis and their own expertise	Does not involve active management, with the fund tracking an index or asset
Expense ratios	Can have higher expense ratios, often ranging from 0.5% to 2% or more	Typically have lower expense ratios, often ranging from 0.1% to 0.5% or less
Capital gains	Can generate capital gains for shareholders when the fund manager sells assets at a profit	Can generate capital gains for shareholders when they sell their shares at a profit
Income	Can generate income for shareholders from dividends or interest payments	Can generate income for shareholders from dividends or interest payments
Trading costs	May have trading costs associated with buying and selling securities within the fund	May have trading costs associated with buying and selling shares on the exchange
Investment objective	May have a specific investment objective, such as income or growth	Typically designed to track an index or asset with no specific investment objective
Tracking error	May have a higher tracking error, meaning the fund may not perfectly track its benchmark	Typically have a lower tracking error, meaning the fund closely tracks its benchmark
Market timing	May discourage market timing by imposing penalties or restrictions on frequent trading	Does not discourage market timing, with shares bought and sold throughout the trading day
Redemption	May have restrictions or penalties on redemption, such as requiring a holding period or charging a fee	Can be redeemed at any time, with no restrictions or penalties