Mutual Funds vs ETFs

Introduction

Instead of buying many individual assets, you can buy a fund — a pooled basket managed for you. This lesson compares the two main types: mutual funds and ETFs.

Mutual Funds

A mutual fund pools money from many investors and a professional manager invests it in a portfolio.

• Managed by professionals (active) or track an index (passive)
• Valued once per day at net asset value (NAV)
• Traded through the fund company, not on an exchange
• May have sales loads and higher fees

ETFs (Exchange-Traded Funds)

An ETF is a fund that trades on an exchange like a stock, during market hours.

• Bought/sold throughout the day at market prices
• Usually passive and low cost
• Transparent holdings
• Liquid and flexible

The Key Difference

Mutual fund:  traded once a day at NAV, through the fund
ETF:          trades on the exchange all day, like a stock

Why Funds Are Popular

Funds give instant diversification — one purchase spreads your money across dozens or hundreds of assets — with professional management (for active funds) and low minimums.

Which to Choose?

• Active mutual fund — if you trust a manager to outperform (fees higher)
• Passive index ETF — for low cost and broad market exposure
• For most long-term investors, low-cost index ETFs are the default choice

Summary

• Mutual funds are pooled, professionally managed, traded at daily NAV
• ETFs trade on exchanges like stocks, usually low cost and passive
• Both provide instant diversification
• Active funds have higher fees; index ETFs are generally cheaper
• Prefer low-cost index ETFs for most long-term investing

Next Lesson

How the most popular low-cost funds work — index funds.