ETFs and mutual funds are both great “middle-of-the-road” investment products. They balance risk and reward well, and cater to investors who want to be hands-off. Yet, these funds differ in key ways. Investors interested in these products need to learn the differences and how they factor into the types of performance and returns they can expect from these vehicles. 

For confident investors, ETFs become a clear opportunity to get more from your money—if you invest wisely. Here’s a side-by-side comparison of these funds and a closer look at the advantages of ETFs over mutual funds. 

Discover the advantages of ETFs over mutual funds

What is an Exchange Traded Fund?

An ETF is a type of fund that tracks the performance of other assets. ETFs can track large indices, a collection of stocks, commodities and more—it all depends on the focus of the fund. ETFs trade on exchanges under a ticker symbol, which means they’re broadly available to buy and sell. Investors don’t need to maintain a regular share purchase schedule, and can buy or sell at any time (marketable security). 

ETF prices fluctuate, which means the current price is the cost of acquiring more shares. Their price comes not only from the daily buying and selling of the fund, but from the underlying assets. Some ETFs track only a handful of assets, while others track hundreds. There’s incredible diversity among ETFs—in 2020, there were more than 7,600 listed ETFs.

Pros of ETFs

Cons of ETFs

What is a Mutual Fund?

Mutual funds pool the money of contributing members to leverage more buying power. The fund itself invests in different securities, which can include stocks, bonds, commodities and more. They’re a type of managed fund, which means an institutional investor is at the helm, directing investment decisions. 

The cost of investing in a mutual fund doesn’t change on a regular basis. Instead, members contribute a fixed amount at regular intervals, which buys more shares at the current price. This is the Net Asset Value (NAV) of the fund: a measure of the fund’s net assets minus liabilities. Funds calculate NAV once per day, usually after trading hours. Mutual funds are a more pure “set it and forget it” option for many investors. 

Pros of Mutual Funds

Cons of Mutual Funds

What Makes ETFs a Better Investment?

There are three chief factors that make ETFs and better investment over mutual funds. Specifically: market price, more control, and lower fees.

Based on these core benefits, ETFs are usually the choice for more savvy investors. They offer enough control to make decisions about your investment, yet offer protection against volatility through diversification. Low fees are always advantageous. 

Opportunities for Casual Investors

Both ETFs and mutual funds are good investment vehicles for individuals who may not have the savvy or motivation to manage their own portfolio. While ETFs take a little more oversight, they also come with lower fees and more opportunities to control your investment. The advantages of ETFs over mutual funds also extend to buying and selling at your leisure, instead of participating on a defined contribution schedule. 

To learn more about the most successful ETFs, sign up for the Liberty Through Wealth e-letter below. The best exchange-traded funds can help you build wealth now.

All of this isn’t to say that mutual funds aren’t a good investment. ETFs simply offer investors more say in how their money works for them. While you won’t have the constant oversight of an investment manager, you’ll get all the benefits of a targeted fund that’s diversified, low-cost and hedged against volatility.

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