When and where to invest can be hectic, especially for those without a financial background. Instead of directly investing in stocks, bonds, and various securities, we have two widely used funds: ETF (Exchange Traded Funds) and Mutual Funds.
The major difference between an ETF and Mutual Funds is that the former can be traded anytime, but the latter can be traded only at the end of the day.
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Key Differences
ETF (Exchange Traded Funds)
- These types of funds can be best described as a group of various securities, such as stocks and bonds, that work by tracking the indexes of the concerned securities.
- These funds resemble stocks to a greater extent. Just like them, these funds are traded through an exchange called Exchange Traded Funds.
- The classic feature of these types of funds that distinguishes them from Mutual Funds is that they can be traded at any given time.
- Since these can be traded at any time thus, their prices also keep on changing multiple times a day.
Mutual Funds
- These types of funds can be best described as a group of various securities, and a sum of money is collected from various investors. Several investors invest in these funds by paying money; this money is then used to again invest in various securities.
- Unlike stocks and an ETFs, these funds are not traded on an exchange. Instead, they are traded after the closing of concerned markets.
- The hallmark feature of these types of funds is that they are only traded once. They can not be traded at any time. They are always traded at the end of the day.
- Since these funds are only traded at a particular time once a day, their price changes once at the end of the day.
Comparison between ETFs and Mutual Funds
| Parameter | ETFs | Mutual Funds |
|---|---|---|
| Meaning | It is an abbreviation for Exchange Traded Funds, which refers to a group of securities traded by tracking various indexes. These indexes also help in determining the performances of the concerned securities. | It refers to a sum of money that is collected from various investors, which is then used in investing in various securities by a trained professional. Various Mutual Funds companies carry out this whole process. |
| Types | Active & Passive, Stock, Bond, Industry or Sector, Commodity, Currency, Inverse, and Leverage are the eight different types of these funds. | Stock, Bond, Index, Balanced, Money Market, Income, Global, and Speciality are the eight different types of these funds. |
| Management | Most of these funds are passively managed, meaning the decisions relating to when and where to invest are taken with the help of stock indexes. | Most of these funds are actively managed, meaning the decisions relating to when and where to invest are taken by the concerned authorities, precisely portfolio managers. |
| Trading | What distinguishes these funds from Mutual Funds is the timing at which these can be traded. Unlike Mutual Funds, these funds can be traded at any time until the stock market closes. | The concept of when to trade is completely different in Mutual Funds than in ETFs. The trading of these types of funds can only be done at the end of the day, typically after the stock market’s closing. |
| Updating of prices | Since these funds can be traded at any time, there is a more frequent update in the prices than the prices of Mutual Funds. | Since these funds can only be traded at the end of the day, prices are less frequently updated than ETFs. The prices are usually updated also at the end of the day. |
| Investment | Most people make an assumption about these types of funds that they must demand a minimum investment, but to surprise, these funds demand no minimum investment at all. | One of the major drawbacks of these types of funds is that they typically require a minimum investment to be made to participate. |
| Middlemen | The middlemen involved in these funds are only brokers. | The middlemen involved in these funds are the Mutual Fund companies and organizations. |
| Expense ratio comparison | The expense ratio involved in these funds is very low compared with Mutual Funds. The reason is that these are passively managed. | The expense ratio involved in these funds is high compared with ETFs. The reason is that these funds are actively managed. |
| Expense ratio statistics | The expense ratio of these funds is estimated to be anywhere around 0.23 percent. | The expense ratio of these funds is estimated to range from 0.73 percent to 1.45 percent. |
| Fee | There are fewer fees associated with these funds in comparison with Mutual Funds. The only fees involved in these funds are brokerage fees. | These funds are associated with a more amount of fee than ETFs. This is large because these funds have the presence of a special annual fee referred to as 12b-1 that is for marketing purposes. |
| Transparency | These funds provide more transparency than Mutual Funds do. One of the best benefits of this type of fund is that they provide daily information regarding the allocation of investment, known as fund holdings. | These funds provide less transparency than ETFs do. This is because these funds provide fund holdings, usually every month. |
| Holding cash | Holding cash refers to keeping an amount of cash in hand instead of investing it somewhere. To my surprise, these funds do not keep any cash on hold. | One of the major benefits of these funds is that these funds typically hold some amount of cash. These funds are estimated to keep approximately five percent of their total cash on hold. |
| Advantages | Available in many stock exchanges, non-required minimum investment, no 12b-1 fee. | Availability of cash holdings, liquidity, handling by skilled professionals, minimum required investment, low risk |
| Disadvantages | No cash holding, high costs if ETFs are actively managed, less diversification | high fees and the expense ratio, low to moderate transparency, and quite difficult to compare a fund with others. |
Major Differences Between Et Fs and Mutual Funds
What exactly are Exchange Traded Funds (ETFs)?
Exchange Traded Funds are a bunch of traded securities, just like stocks, that work by tracking various or particular indexes. Here, the tracking index means that the concerned provider normally buys securities estimated to have the same weight as in the concerned index to see or picture its performance. The prices of these funds keep changing multiple times as these funds can be purchased and sold at any time.
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Features of Exchange Traded Funds (ETFs)
- A group of various securities whose performances depend on index tracking is known as Exchange Traded Funds (ETFs).
- These funds can be purchased and sold at any time. There is no bar on a time restriction. The buying and selling of these funds happen through stock exchanges.
- Since they can be bought and sold anytime, their prices keep changing.
- People serving as ETF providers act as brokers and charge their fees.
- Anyone who wants to invest in ETFs can do so without worrying about minimum investment.
- These funds have high transparency as the information about the investment allocated is disclosed daily.
- These funds can be broadly categorized into eight types: Active & Passive, Stock, Bond, Industry or Sector, Commodity, Currency, Inverse, and Leverage.
What exactly are Mutual Funds?
Mutual Funds are a group of various securities and a sum of money that various investors give to invest in the concerned securities. Various Mutual Funds companies invest in various securities and give the investors all their entitled gains.
The hallmark feature of these funds is that their trading only occurs at the end of the day after the stock markets close. Due to this reason, their prices also change only at the end of the day.
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Features of Mutual Funds
- It can be best described as a sum of money various investors give to invest in various securities.
- The trading of these funds does not occur on stock exchanges, so a person needs to contact Mutual Funds companies to invest in them.
- To purchase and sell these funds, one must wait until the end of the day for the stock market to close.
- Since they can be purchased and sold only at the end of the day, hence their prices also change or update at the end of the day.
- In some cases, these funds typically demand a minimum investment.
- These funds have moderate transparency as the information relating to investment allocation is done monthly.
- These funds can be broadly categorized into eight categories: Stock, Bond, Index, Balanced, Money Market, Income, Global, and Speciality.
Contrast Between ETFs And Mutual Funds
Meaning
- ETF – ETF is an abbreviation for Exchange Traded Funds, a group of securities that are invested and traded by tracking indexes. It should be noted that not only are investments made by tracking indexes, but these indexes also determine the performance of the concerned securities.
- Mutual Fund – When a group of people invests their money into these Funds, their altogether collected money is used to invest in various securities by the concerned Mutual Funds companies. When this happens, it is labeled as Mutual Funds.
Types
- ETF can be broadly categorized into eight types: Active & Passive, Stock, Bond, Industry or Sector, Commodity, Currency, Inverse, and Leverage.
- Mutual Fund – It can be broadly categorized into eight categories: Stock, Bond, Index, Balanced, Money Market, Income, Global, and Speciality.
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Types of ETFs and Mutual Funds
ETFs
- Active ETFs: As the name suggests, these types of ETFs are actively managed, meaning these funds do not rely on indexes.
- Passive ETFs: These types of ETFs are completely opposite of Active ETFs as they are passively managed, meaning they typically rely on stock indexes.
- Bond ETFs: These types of funds are concerned with investing in Bonds and helping clients generate a regular income through interest received on Bonds.
- Stock ETFs: These types of funds are concerned with investing in several Stocks that usually belong to a particular sector. However, it should be noted that the stocks invested through ETFs do not result in the ownership of the client like usual stocks do.
- Industry or Sector ETFs: These types of funds are concerned with investment in a particular or specific industry or sector.
- Commodity ETF: As per the name, these types of funds are concerned with the investment in things that belong to various commodities. Commodities here could be anything, such as petroleum, gold, agricultural items, etc.
- Currency ETFs: These types of funds are associated with investing in various currencies to give investors clear exposure to the same.
- Inverse ETFs: These types of ETFs are concerned with making gains from the stocks that are expected to become lower in price. It works by first selling a stock at a higher price and then buying it again at a lower price.
- Leveraged ETFs: These types of ETFs are concerned with increasing the return of those securities that come under underlying indexes.
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Mutual Funds
- Stock Funds: As the name suggests, these types of funds are concerned with investing in several stocks.
- Bond Funds: These types of funds are concerned with investing in Bonds and helping the client generate a regular income in the form of interest received as a return.
- Index Funds: These funds are very similar to Exchange Traded Funds (ETFs) as these funds also rely on indexes to make investment decisions.
- Balanced Funds: These funds are concerned with mixed investments, meaning instead of either investing in stocks or bonds or others, these funds invest in all types of financial assets.
- Money Market Funds: These types of funds are concerned with investing in financial securities that are short-term in nature but are high in quality.
- Income Funds: As the name suggests, these types of funds are concerned with investing in those securities that provide a regular income.
- International or global funds: These types of funds are concerned with investing in those securities that exist only outside the domestic country.
- Specialty Funds: These types of funds target a particular industry or sector regarding investing.
Management
- ETF – Typically, these types of funds are passively managed. Passively managed means that, doing all the calculations on how to invest in securities, the concerned brokers follow an index, and as per that, they invest in securities. Since this approach does not carry much work, it is also called the hand-off approach. However, there are also actively managed ETFs out there.
- Mutual Fund – Typically, these types of funds are actively managed. When the concerned people deal in these types of funds, they do lots of calculations on how to invest instead of just following an index. Due to this reason, this type of management can also be termed a hands-on approach. However, these funds can also be managed passively.
Trading
- ETF – These types of funds are traded very similar to stocks. These are usually traded with the help of stock exchanges. The major characteristic of these funds distinguishing them from Mutual funds is that they can be traded at any time until the stock market stays open.
- Mutual Fund – These funds are traded in an opposite manner. The trading of such funds occurs only once a day, i.e., at the end of the day after the closing of stock markets.
Updation of prices
- ETF – ETF Prices update or fluctuate more frequently than the prices of mutual funds. Since the trading of these funds never stops till the closing of the stock market, their prices also keep on updating until the stock market close.
- Mutual Fund – Prices of Mutual Funds update or fluctuate less frequently than ETF prices. Since the trading of these funds only happens at the end of the day, their prices also update or fluctuate at the end of the day.
Investment
- ETF – Generally, people assume that in the case of ETFs, it would be required to make a minimum investment. But surprisingly, these funds do not demand people to make a minimum investment. One could even buy a single share per their wishes, which would be alright.
- Mutual Fund – One of the major drawbacks of these funds is that they generally require people to make a minimum investment to proceed ahead.
Middlemen
- ETF – If someone wants to invest in ETFs, they must contact brokers specializing in investments in these types of securities.
- Mutual Fund – Unlike ETFs, no brokers are involved in the process of Mutual Funds. However, one must contact Mutual Funds companies to invest in these funds.
Expense ratio
- ETF – The expense ratio of these types of funds is much less than mutual funds. The reason behind a low expense ratio is that these funds are passively managed. According to data from 2016, these funds’ expense ratio is estimated to be near 0.23 percent.
- Mutual Fund – The expense ratio of these types of funds is higher than ETFs. The reason behind a high expense ratio is that these funds are actively managed. The expense ratio for these types of funds, as per the data of 2016, ranges from 0.73 percent to 1.45 percent.
Fee
- ETF – In comparison with Mutual Funds, these funds have lower fees. The brokerage fees are the only ones to pay while investing in ETFs, as these funds are traded only through stock exchanges. In addition, there is a special 12b-1 fee that is present in Mutual funds but absent in ETFs, which makes these funds cheaper.
- Mutual Fund – These funds are estimated to have higher fees than ETFs. This is large because of the presence of 12b-1 fees in Mutual Funds. This type of fee is associated with a marketing fee that must be paid annually.
Transparency
- ETF – There is more transparency in these funds than in Mutual Funds. This is because the fund holdings of these funds are disclosed daily. Fund holdings refer to the information relating to the allocation of investments.
- Mutual Fund – There is less transparency in these funds than in ETFs, and this is large because the fund holdings of these funds are typically disclosed on a monthly basis.
Holding cash
- ETF – Holding of cash refers to keeping a certain amount of cash in hand instead of investing it somewhere. Regarding ETFs, these funds do not keep any percentage of cash reserved for holding.
- Mutual Fund – The case of cash holding is the opposite in these funds from ETFs. Approximately five percent of cash is estimated to be reserved for holding purposes in these types of funds.
Advantages
- ETF – The major advantage of these funds is that they have many stocks exchanged through which they can be traded. Their fee and expense ratio is also very low, and they do not even demand a minimum investment.
- Mutual Fund – Availability of cash holdings, liquidity, handling by skilled professionals, minimum required investment, and low risk are some of the major advantages of Mutual Funds.
Advantages of Exchange Traded Funds (ETFs)
- More diversification.
- Low fee.
- Low expense ratio.
- Requires no minimum investment
- More transparency
Advantages of Mutual funds
- Presence of cash holdings.
- Management by skilled professionals.
- A low amount of minimum investment.
- Active management.
Disadvantages
- ETF – No cash holding, high costs if ETFs are actively managed, and less diversification are some of the major disadvantages of these types of funds.
- Mutual Fund – The major disadvantage of these funds is that they have very high fees and expense ratios. Along with that, there is low to moderate transparency in this process. Also people think it is not easy to compare a fund with others.
Disadvantages of Exchange Traded Funds (ETFs)
- Absence of cash holdings.
- Less liquidity.
- High fees if there is active management.
Disadvantages of Mutual funds
- High fees.
- High expense ratio.
- Moderate transparency.
CONCLUSION
Exchange Traded Funds (ETFs) and Mutual Funds are two of the most popular, less risky funds. Due to various similarities, both funds are often confused with one another. But despite all the similarities, both are very different.
Mutual Funds work by collecting a sum of money from various people and then investing it in securities. These funds can only be traded at the end of the day after the stock markets close. ETFs work by investing in securities by tracking indexes. These funds can be traded at any time until the stock markets close.
FREQUENTLY ASKED QUESTIONS (FAQs)
Q1. What are the different types of ETFs and Mutual Funds?
The former can be categorized into eight categories: Active & Passive, Stock, Bond, Industry or Sector, Commodity, Currency, Inverse, and Leverage. Similarly, the latter can also be categorized into eight categories: Stock, Bond, Index, Balanced, Money Market, Income, Global, and Speciality.
Q2. What is meant by holding cash?
Cash holding refers to keeping a sum of money as cash in hand instead of investing it somewhere. For example, ETFs do not hold cash, while Mutual Funds keep approximately five percent of their cash on hold.
Q3. Why is there a more frequent updating of prices in ETFs but not in Mutual Funds?
There is a frequent updating of prices in ETFs because these funds can be traded at any time of the day. On the other hand, there is a less frequent updating of prices in Mutual Funds because these can be traded only at one time of the day, precisely at the end of the day.
Q4. What are the major differences between ETFs and Mutual Funds?
The major difference between the two is that the former can be traded at any time of the day while the latter can only be traded at the end of the day. Another significant difference between the two is that the former is passively managed, whereas the latter is actively managed.
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Business, marketing, and blogging – these three words describe me the best. I am the founder of Burban Branding and Media, and a self-taught marketer with 10 years of experience. My passion lies in helping startups enhance their business through marketing, HR, leadership, and finance. I am on a mission to assist businesses in achieving their goals.