You're interested in investing, but what's the difference between a mutual fund and an ETF? (2024)

A mutual fund is a type of investment vehicle that pools money from many investors and invests it in a portfolio of securities, such as stocks, bonds, commodities or other assets. The fund is managed by a professional fund manager who makes decisions on what to buy and sell, and charges a fee for their service. As an investor, you own a share of the fund and receive dividends, interest or capital gains from the fund's performance. You can buy and sell mutual fund shares through a broker, a financial advisor or directly from the fund company.

An ETF is a type of investment vehicle that tracks the performance of an index, a sector, a commodity or a basket of assets. The ETF holds the underlying assets or uses derivatives to replicate their returns. The ETF is traded on a stock exchange like a stock, and its price fluctuates throughout the day based on supply and demand. As an investor, you can buy and sell ETF shares through a broker or an online platform. You pay a commission for each transaction, but you also pay a lower management fee than a mutual fund.

Mutual funds and ETFs have some similarities, such as offering diversification, convenience, and professional management. However, they also have distinct features that may affect your investment goals, preferences and costs. When comparing them, consider performance, fees, taxes, and liquidity. Mutual funds and ETFs may have different returns depending on their investment strategy, fees, taxes and tracking error. Tracking error is the difference between the ETF's performance and the index it follows. Generally, ETFs have lower tracking error than mutual funds due to their lower costs and more frequent trading. Mutual funds charge an annual management fee plus other expenses like sales loads or redemption fees. ETFs charge a lower management fee but you pay a commission for each trade which can add up if you trade frequently; you may also pay bid-ask spreads. Mutual funds distribute dividends, interest and capital gains to their shareholders which are taxable in the year they are received; ETFs are more tax-efficient because they distribute less capital gains and have lower turnover rates. Mutual funds are priced once a day at the end of the trading session while ETFs are priced throughout the day; however some ETFs may have low trading volumes or wide bid-ask spreads which can make them harder to trade or affect their price.

There is no definitive answer to which one is better, as it depends on your investment objectives, risk tolerance, time horizon and cost sensitivity. You may also consider other factors, such as the fund's reputation, performance history, holdings, diversification, transparency and customer service. You may also combine both mutual funds and ETFs in your portfolio to take advantage of their strengths and mitigate their weaknesses. The key is to do your research, compare your options and make informed decisions.

If you want to learn more about mutual funds and ETFs, and how they relate to investment banking, you can take online courses, read books, blogs or magazines, listen to podcasts or watch videos on the topic. You can also consult a financial advisor, a broker or an investment banker for professional guidance and advice. Investing can be rewarding, but also challenging and risky. Therefore, it is important to educate yourself, diversify your portfolio and monitor your performance regularly.

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

Investment Banking

+ Follow

Thanks for your feedback

Your feedback is private. Like or react to bring the conversation to your network.