The Difference Between An ETF And A Mutual Fund
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.
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.
The views and opinions expressed in the posts on this page are those of the author and do not necessarily reflect the position or views of Ingalls & Snyder, LLC. Certain content on this page were originally posted in a personal blog maintained and operated independently by the author prior to joining Ingalls & Snyder, LLC.
The content on this page are for informational purposes, and is not intended to be a formal research report, a general guide to investing, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which any accounts should be handled. Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such. Investing involves risk, including loss of principal, and no assurance can be given that a specific investment objective will be achieved.