ETFs and Mutual Funds: Alike but Different

Mutual funds* and exchange-traded funds (ETFs)* are both baskets of individual securities that offer a variety of asset classes and niche markets that can help investors to diversify** their portfolios. There are differences between them, however, that could make one option preferable for a particular investor.

Mutual Funds

Initial investments are usually a flat dollar amount, which may or may not be affordable for an investor. Also, mutual funds are either actively managed or pinned to an index. Earnings can be taxable and are paid as dividends, capital gains, or increases in the share price. Mutual funds allow automatic investments and withdrawals. Share prices are calculated at the end of each trading day when all trades are executed. Not all funds have a sales fee but do charge other fees and expenses, which vary.

Exchange-Traded Funds

ETFs are traded on an exchange, like stocks, throughout the day, so investors can purchase as little as one individual share. Most ETFs follow an index, but some are actively managed. Passively managed ETFs may have lower expenses and can be tax efficient because trades are only made to match changes in their index. However, some trades can trigger the capital gains tax. Index funds can be less volatile than those that follow a specific sector. When determining how much an ETF will cost, remember to consider fees, and the bid/ask spread and premium/discount to Net Asset Value (NAV). Consider the risks of different ETFs and have current information before you invest. Your financial professional can help you decide whether mutual funds or ETFs will fit into your investment plan.

*Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money. Because mutual fund values fluctuate, redeemed shares may be worth more or less than their original value. Past performance won’t guarantee future results. An investment in mutual funds may result in the loss of principal.

** Diversification cannot eliminate the risk of investment losses. Past performance won’t guarantee future results. An investment in stocks or mutual funds can result in a loss of principal.