How do you tell if a fund is a mutual fund or ETF?
Mutual funds are usually actively managed, although passively-managed index funds have become more popular. ETFs are usually passively managed and track a market index or sector sub-index. ETFs can be bought and sold just like stocks, while mutual funds can only be purchased at the end of each trading day.
Mutual funds are priced once a day at the net asset value and they're traded after market hours. ETFs are traded throughout the day on stock exchanges just as individual stocks are. ETFs often have lower expense ratios and are generally more tax-efficient due to their more passive nature.
SPY was launched in January 1993 and was the very first ETF listed in the U.S.10. Index investing pioneer Vanguard's S&P 500 Index Fund was the first index mutual fund for individual investors.
Unlike with mutual fund shares, retail investors can only purchase and sell ETF shares in market transactions. That is, unlike mutual funds, ETFs do not sell individual shares directly to, or redeem their individual shares directly from, retail investors.
Investment companies can be structured as either open-end or closed-end funds—although most investment companies are open-end funds, known more commonly as mutual funds. One of the key distinguishing features of a mutual fund is that investors can buy and sell shares at any time.
The most apparent is that ETF shares are traded on stock exchanges just like regular stocks, while mutual fund shares are traded only once per day after markets close.
ETFs offer numerous advantages including diversification, liquidity, and lower expenses compared to many mutual funds. They can also help minimize capital gains taxes. But these benefits can be offset by some downsides that include potentially lower returns with higher intraday volatility.
Unlike ETFs, mutual funds can offer more specific strategies as well as blends of strategies. Mutual funds offer the same type of indexed investing options as ETFs but also an array of actively and passively managed options that can be fine-tuned to cater to an investor's needs.
Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. *ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
“And they are incredibly cheap.” However, there are disadvantages of ETFs. They come with fees, can stray from the value of their underlying asset, and (like any investment) come with risks. So it's important for any investor to understand the downside of ETFs.
What is the key difference between an ETF and a mutual or index fund?
Both ETFs and index mutual funds are pooled investment vehicles that are passively managed. The key difference between them (discussed below) is that ETFs can be bought and sold on the stock exchange (just like individual stocks)—and index mutual funds cannot.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
ETFs are open-ended funds, meaning they can constantly take on new investors and as they do, the fund's assets grow.
Exchange-traded funds (ETFs) are a type of index funds that track a basket of securities. Mutual funds are pooled investments into bonds, securities, and other instruments. Stocks are securities that provide returns based on performance.
A mutual fund statement provides a comprehensive summary of all the mutual fund investments you have made. If you ask for a statement from a particular fund house, you will get information only on the investments made by you in that fund house's schemes.
In order for the investment company to be classified as diversified it must meet the 75-5-10 rule. In other words the fund's assets must be invested, the assets can't simply be held in cash. issuers. Cash and cash equivalents are countered as part of the 75%.
A 401(k) is an employer-sponsored, tax-deferred retirement plan. The employer chooses the 401(k)'s investment portfolio, which often includes mutual funds. But a mutual fund is not a 401(k).
To discourage excessive trading and protect the interests of long-term investors, mutual funds keep a close eye on shareholders who sell shares within 30 days of purchase – called round-trip trading – or try to time the market to profit from short-term changes in a fund's NAV.
Mutual funds let you pool your money with other investors to "mutually" buy stocks, bonds, and other investments. They're run by professional money managers who decide which securities to buy (stocks, bonds, etc.) and when to sell them.
Should I sell my mutual funds and buy ETFs?
If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.
In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds, and corporate bonds come with somewhat more risk than U.S. government bonds.
The single biggest risk in ETFs is market risk.
Disadvantages of ETF investing
Since ETF fund managers cannot use their discretion to choose portfolio securities or deviate from the index weightage, investors cannot expect an outperformance or alpha generation from their ETF investments.
ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.
