There are three main differences between ETFs and mutual funds. First, ETFs can be bought and sold on a stock market. Second, ETFs are mostly passively managed, whereas mutual funds are actively managed. Third, ETFs track a specific, single index, whereas mutual funds can consist of any mix of assets and instruments.
What does an actively managed fund mean?
An actively managed fund has a dedicated portfolio manager (or managers); investment professionals who pick securities for the fund's portfolio to meet the fund' investment goals.
What does a passively managed fund mean?
A passively managed fund is basically the opposite of an actively managed fund. Here, no flesh-and-blood investment managers take part in the process. Securities in the fund are automatically added or removed to match a specific index's behaviour.
So what are mutual funds?
How do mutual funds work? A fund provider - such as Vanguard - will have a catalouge of funds offering different investment opportunities. These can differ in many ways, including what industry or industries they cover, what percentage of the fund is invested in stocks, bonds and other instruments, or what the broader goal of the fund is. A client chooses a fund that suits their investment needs, and invests in the fund. The fund provider uses this capital to invest in the assets the fund is created for. Then, an investment manager monitors the fund, and makes any necessary changes to its composition. The fund's ultimate aim is to benefit from market movements. In an important difference to ETFs, investors have to pay higher fees for mutual funds compared with a passively managed fund, as mutual funds involve human labor in the form of portfolio managers.
What is an ETF?
ETF is short for exchange-traded fund. An ETF is fund traded on a stock exchange. A fund can include many assets types, including equities, bonds, commodities or even forex. For example, a fund that tracks the S&P 500 Index holds the 500 stocks that constitute the index. The most popular ETFs are equity ETFs that track popular equity indexes like the NASDAQ 100 or the S&P 500.
What else do you need to know about ETFs?
Here are a few other topics that can broaden your knowledge of ETFs:
- What is an ETF?
- What is the difference between US and EU ETFs?
- What does an ETF portfolio mean?
- What is an ETF expense ratio?
- How liquid are ETFs?
How can I buy ETFs?
For more info, click here to learn how to buy ETFs online.