Exchange-traded funds, or ETFs, are similar to mutual funds in their purpose, but not in their application. Both instruments bundle together securities in order to offer investors diversified portfolios. Anywhere fromr 100, or even up to 3,000 different securities can make up a fund, yet, the two investment types have significant applications and are used by investors to, oftentimes, accomplish different goals.
ETFs trade throughout the trading day, like a stock, while mutual funds trade only at the end of the day. If you call your financial advisor and tell them I want to buy "XYZ" at 1230pm, the price that the fund will be purchased at will be the 4pm price, or price at the end of the day (NAV). Most ETFs track to a particular index and therefore have lower operating expenses than actively managed mutual funds. Thus, ETFs can improve your rate of return on investments because of the lack of internal fees. In addition, ETFs have no investment minimums or sales loads, unlike traditional mutual funds, which have both. However, most indexed mutual funds will not have sales loads.
There are several other differences in ETF's and Mutual Funds, such as, how they redeem shares and the tax implications that these events cause. ETF's are also a relatively newer investment vehicle than Mutual Funds, which can be found in nearly every 401k or profit-sharing plan in the marketplace.
In the end, both serve a purpose and can help individual investors achieve their financial goals. Neither is necessarily better than the other, but rather when used in the ideal type of situation can have a better application for you.
| ETFs | Mutual Funds |
| Trade during trading day | Trade at closing NAV |
| Low operating expenses | Operating expenses vary |
| No investment minimums | Most have investment minimums |
| Tax-efficient | Less tax-efficient |
| No sales loads | May have sales load |
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