ETFs vs Mutual Funds

Perhaps you are new to investing and don't have the time to make your own stock picks, and that's fine. ETFs vs Mutual Funds: which one is for you, and why. Find out below.

What are ETFs and Mutual Funds?

When purchasing an Exchange Traded Fund (ETF) or mutual fund, you are essentially purchasing a bundle of assets. Commonly, they are comprised of stocks or bonds.

Investment funds are inherently diversified and generally cover a variety of stocks and bonds. Meaning poor performance by one stock has a lesser effect on your portfolio value, essentially reducing risk.

Exchange traded funds are bought and sold on stock exchanges. Whereas mutual funds are bought from your local fund manager, or online. There is an array of options to pick from when deciding on an investment fund. Commonly included asset classes are stocks, bonds, and currencies. You can also buy funds representing certain sectors within the market, e.g. Materials or Information Technology.

While ETFs and mutual funds are similar, there are some key differences that may alter your decision to purchase either one, as I will discuss below.

Exchange Traded Fund – Advantages

Low buy in price: Your potential buy in cost could be as low as the price of single share. Whereas mutual funds generally require to you to buy a certain number of units based on a dollar amount. A minimum buy in of $US2,000-3000 is not uncommon.

Freedom and flexibility: ETFs can be bought during normal market trading hours. Mutual funds will give you the same buy in price, regardless of the time of day. As the Net Asset Value (NAV) is determined after trading has ended for the day.

Lower Fees: By design, ETFs are made to track an index or a basket of stocks. Whereas mutual funds are typically managed, and they place an increased emphasis on obtaining above average returns. Also, they typically charge higher annual fees. You can expect to pay annual fees of 0.10%-0.1% for ETFs and 1.0-2.0% for mutual funds.

Mutual Fund – Advantages

No Commissions: Mutual funds do not require you to pay brokerage fees when trading. If you are trading regularly, this will be beneficial to you. Whereas you are required to pay brokerage fees on every trade made when purchasing an ETF through a stock exchange.

Active Management: Mutual funds are actively managed more often than ETFs. A mutual fund run by an experienced investment manager is typically preferred by most, over a fund simply purchasing a list of stocks on an index.