Investing in ETFs For Dummies
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What is the difference between an ETF and a mutual fund? After all, mutual funds also represent baskets of stocks or bonds. The two, however, are not twins. They're not even siblings. Cousins are more like it. Here are some of the big differences between ETFs and mutual funds:

  • ETFs are bought and sold just like stocks (through a brokerage house, either by phone or online), and their prices change throughout the trading day. Mutual fund orders can be made during the day, but the actual trading doesn't occur until after the markets close.

  • ETFs tend to represent indexes — market segments — and the managers of the ETFs tend to do very little trading of securities in the ETF. (The ETFs are passively managed.) Most mutual funds are actively managed.

  • Although they may require you to pay small trading fees, ETFs usually wind up costing you less than mutual funds because the ongoing management fees are typically much less, and there is never a load (an entrance and/or exit fee, sometime an exorbitant one) as you find with many mutual funds.

  • Because of low portfolio turnover and also the way ETFs are structured, ETFs generally declare much less in taxable capital gains than mutual funds.

The table provides a quick look at some ways that investing in ETFs differs from investing in mutual funds and individual stocks.

ETFs Versus Mutual Funds Versus Individual Stocks
ETFs Mutual Funds Individual Stocks
Priced, bought, and sold throughout the day? Yes No Yes
Offer some investment diversification? Yes Yes No
Is there a minimum investment? No Yes No
Purchased through a broker or online brokerage? Yes Yes Yes
Do you pay a fee or commission to make a trade? Typically Sometimes Yes
Can that fee or commission be more than a few dollars? No Yes No
Can you buy/sell options? Sometimes No Sometimes
Indexed (passively managed)? Typically Atypically No
Can you make money or lose money? Yes Yes You bet

About This Article

This article is from the book:

About the book author:

Russell Wild is a NAPFA certified financial advisor and principal of Global Portfolios, an investment advisory firm based in Allentown, PA that works with clients of both substantial and modest means. He has written two dozen books and numerous articles on financial matters.

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