The Difference Between An ETF And A Mutual Fund

August 1, 2017
Lori Zager

The basic difference between a mutual fund and an exchange traded fund (ETF) is that an ETF trades like a common stock as its price changes throughout the trading day. Trades in mutual funds can only be executed once a day after the market closes. Additionally, ETFs may be sold short and may be purchased on margin.

The fee structures of ETFs and mutual funds are also different. Although both have costs (called expense ratios), ETFs are often less expensive to buy.

If you buy an ETF, you may pay a commission on your purchase.  Mutual funds may have sales charges, redemption fees and other transaction fees. So read the fine print and know what it costs you to buy a mutual fund. 


Comment:

Contrary to popular belief, higher fees and expense ratios don’t necessarily produce superior returns. In a low interest rate environment, those costs take on renewed importance. For example, if you are only making 2% on your investments, 1% in expenses would take half of your profits.   

Legendary investor Warren Buffett discussed in his 2013 annual letter to shareholders, how he advises his wealth be invested after he dies.  He suggested that 10% of the cash be put in short-term government bonds and 90% in a very low-cost S&P500 index fund.  Why the index fund?…The investor gets low fees and diverse exposure to the US economy.  

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