Mutual Funds vs. ETFs
Although Mutual funds and exchange traded funds (ETFs) share many similarities, they are not the same.
Mutual funds provide professional investment management and exposure to investments retail investors may not typically be able to access. A mutual fund pools money together from shareholders to allocate per the funds’ objectives. In a mutual fund, the investors own a unit of the fund, not the underlying stocks or bonds. The fund manager buys and sells the underlying positions, attempting to outperform the benchmark. This can lead to high turnover within the fund, resulting in additional costs and possible negative tax ramifications. The investor has no control over the activity within the fund.
An exchange traded fund (ETF) provides similar broad exposure to a sector, style, or asset class. Most ETFs are not actively or professionally managed. An individual investor owns the shares of the ETF, same as they would an individual stock, allowing investors to direct the buying and selling, therefore controlling the tax implications. As most ETFs are passive, the associated costs are frequently less compared to mutual funds. We see many benefits of utilizing ETFs in place of mutual funds; however, as with any investment, diversification, fees, and portfolio construction are vital to the success of the investment.