Mutual funds have been a part of investor’s plan for many years. In recent years, ETFs (short for Exchange Traded Fund) have risen as a popular investment option. The two investment options are more similar than you would think. Both investment vehicles represent a bundle of 100-3000 stocks or bonds that is managed by a professional. Other key similarities include the possibility of less risk than individual bonds or stocks as well as the wide variety of investment options that are available with these investment vehicles. While there are many similarities between the two, there are key differences that set them apart.
The way that ETFs and mutual funds are priced differ from one another. The Vanguard Group explains it like, “You can buy an ETF for the price of 1 share—commonly referred to as the ETF's market price. That price could be as little as $50 or as much as a few hundred dollars, depending on the ETF. Mutual fund minimum initial investments aren't based on the fund's share price. Instead, they're a flat dollar amount.” The market price may be more appealing than the flat fee for investors.
The way each investment is priced varies. ETFs provide real-time pricing, which means the price is updated as it changes throughout trading hours. ETF orders can be more complex through offering different order types; however, investors may stick with a simple market order. On the other hand, mutual funds have one consistent price throughout the day. The price is calculated for the following day after trading has concluded.
Like all investment vehicles, you must pay either short-term or long-term capital gains when selling shares. To be considered short-term, an investor must hold the security for less than a year whereas long-term is held over one year. Investopedia states, “Mutual funds typically have higher tax implications because they pay investors capital gains distributions. These capital distributions paid out by the mutual fund are taxable. ETFs usually do not payout capital distributions, and therefore, can have a slight tax advantage.”
While ETFs and mutual funds are similar, there are fundamental differences between the two. Knowing these differences can help investors make savvy decisions. If you aren’t sure which best fits in your financial plan, contact one of our financial advisors to learn more.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investors should consider the investment objectives, risks, charges and expenses of the Exchange Traded Fund or Mutual Fund carefully before investing. The prospectus and, if available, the summary prospectus contains this and other important information about the Exchange Traded Fund. You can obtain a prospectus and summary prospectus from your financial representative. Read carefully before investing.