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 | 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 |