Fund Comparison – Investing Between Mutual Funds and ETFs
An exchange-traded Fund is simply a group of mutual funds and trade-listed securities, i.e. they are traded on major stock exchanges. There are usually several ETFs on a given exchange and investors are able to purchase shares from any combination of those ETFs that they may be interested in. While an ETF does not provide its own inventory, the process of buying and selling between users of an exchange-trade product is the same as if it were their inventory.
The major difference between the two types of products is that ETFs allow more freedom for the investor, since the securities can be bought and sold anywhere, but often at a higher cost. This cost is typically passed on to the buyer of the shares, typically through a commission. Funds typically represent a single portfolio of securities and can also track and manage multiple investments with the use of split-systems. However, it is generally recommended that investors stay away from both types, and focus their attention only on ETFs, since the fees required to buy and sell them are generally less than their mutual fund counterparts.
A mutual fund generally represents a single share class of securities, while an ETF represents multiple share classes, with all of the expense ratios associated with those classes being the same. When comparing between the two types of products, it is generally more cost-effective to invest in ETFs since the costs for trading are lower and the cost of management is also lower. However, with all of the opportunities that investors have with ETFs, it may be more difficult for investors to find a high quality mutual fund that fits their investment profile.