Fundamentals of ETFs Vs Mutual Funds
What are funds and ETFS? An exchange traded fund is simply a kind of investment fund, and exchange traded product, i.e. they’re traded on major stock exchanges like the New York Stock Exchange (NYSE) and the NASDAQ Composite Market (NASDAQ). Similar to other mutual funds, ETFs function as vehicles for institutional investors. On the stock market, a “fund” is any entity or individual who buys a certain quantity of a certain stock or other asset, then invests in that stock or asset and uses a specific methodology to realize his profits.
While most people think of mutual funds as being similar to bonds in that they both invest in certain well-known companies that are guaranteed to return a specific amount over time, ETFs function differently. Whereas a bond can have multiple layers of managers, and while stocks can have several different types of workers who work with different companies, ETFs have one manager who manages them all. That manager may be connected directly to the company or through an entity that is called an investment fund. Funds are not limited to any one industry or investment strategy, unlike mutual funds. And unlike mutual funds that typically only make money during a given financial year, ETFs can make money throughout the year.
Most investors have heard of index funds, which are just what they sound like: general-purpose funds that buy a wide array of various shares of the same type of investor-owned stock. Funds and ETFS are very different in a number of ways, and it is important to understand these differences if you’re going to invest intelligently in the stock market. Some things that are similar between ETFs and mutual funds include expense ratios, liquidity, management style, minimum drawdown, profit potential, minimum premium, and distribution fees.