The Difference Between Mutual Funds And ETFs
Updated: Feb 8
These investment types are two of the most common ways people invest today. While similar, they have differences that make them better in different situations.
Mutual funds have been around forever and were created so that investors could pool their funds together and get access to a basket of investments they would not have been able to afford on their own. When you invest in a mutual fund, you are buying shares of the mutual fund company, which then uses your money to buy securities that align with the stated purpose of the fund. So when you sell your shares, you are actually selling them back to the mutual fund company. Exchange traded funds (ETFs) are very similar, but the shares are bought and sold on an exchange, like stock. The way you make money with both is when the securities (usually stocks) owned by the fund increase in value. The main advantage of each is; - Mutual fund companies allow you to buy fractional shares, so you can contribute as much money as you'd like. This makes it possible to setup recurring purchases of the same dollar amount, like in a 401k. - ETF management fees tend to be lower because they are able to be managed more passively. This usually leads to significant tax savings over time.