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ETFs vs. Mutual Funds

Updated: 9/17/2019
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Mutual Funds

A mutual fund is an investment vehicle where investors pool together their money to buy stocks or bonds. The decisions on what securities to buy are made by the fund manager. When an investor contributes money into a fund, he or she is granted a stake in all the investments of that fund. The investor's share is determined by his or her level of investment.

Net asset value, or NAV, determines the price per share. NAV is the total securities value of the fund divided by however many shares are outstanding. For example, a mutual fund with securities over $5 million and one million shares would have a NAV of $1. The NAV of a fund varies daily, depending upon the underlying price of the fund's holdings.

ETFs

An ETF, or Exchange Traded Fund, tracks a market index, but can be traded like it was a stock. ETFs package together similar securities from a particular index; they do not actually track mutual funds. The reason is that since most funds only reveal their holdings at certain intervals, the ETF could not re-adjust its holdings in a timely manner.

One difference between ETFs and mutual funds is that ETFs are traded on stock exchanges, so they are able to be bought or sold regardless of the time of day. ETFs are also better in terms of taxes because they typically have extremely low overhead associated with them.

One other difference is that mutual funds usually must be purchased at NAV, based upon the day's closing price. So if there is a negative outcome, an automatic sell-stop order cannot be given, and prices must fall all the way to the close of the day.

ETFs, unlike mutual funds, have no investment minimums, early withdrawal fees, or minimum holding periods. Mutual funds typically have different share classes, which may have holding requirements to avoid certain fees imposed when selling them.

Another key difference between ETFs and mutual funds is that mutual funds cannot usually be purchases on margin or sold short. That is not the case with ETFs. ETFs are also available from just about any broker.

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