Mutual Funds Vs. ETFs

Last time, we covered index funds as a whole and talked about mutual funds and ETFs without going into detail about the differences between them. However, it’s important to be able to make the distinction between the two. This article is great for gaining further insight into index funds and the differences between mutual funds and ETFs.

Mutual funds and ETFs are essentially baskets of stocks, bonds, and other securities that are created to closely track a market index. If you need a refresher on index funds before we get started, check out our article on that here

Before we get into the differences, lets talk about actively-managed vs passively-managed index funds. In our last article, we exclusively discussed passively-managed funds, which try to track a market index based on the belief that the market will outperform any other holding in the long-term. Actively-managed funds, on the other hand, aim to outperform the market index by frequently buying and selling securities to create a more profitable outcome. Both ETFs and mutual funds can be either passively or actively managed. 

Now let’s get into the differences! The main difference is that ETFs are traded like stocks, so they can be bought and sold throughout the day and the price fluctuates during trading hours. On the other hand, mutual funds can only be traded at the end of the day and are therefore priced only once in a day. A mutual fund’s price, also known as net asset value (NAV), is calculated by dividing the total value of the holdings in the portfolio by the amount of the fund's outstanding shares. Another significant difference is that ETFs can only be bought as whole shares while mutual funds can be bought as fractional shares. Depending on personal preference on trading and the minimum required investment, one might be a better choice than the other.

We hope this helps, and drop any questions/suggestions in the comments!