The Difference Between Funds and ETFs

Funds and ETFS are basically pools of cash where investors accumulate shares of stock that are then invested in other stocks. Some mutual funds are even more actively managed, with investment professionals at the head of each fund, determining where to invest the assets of the fund. On the ETF front, however, most are strictly passively managed and follow a predetermined index, like the Standard & Poor’s 500, rather than having an individual choosing and picking the investments. Investors can’t really be said to have made money from ETFs because they’re not actively managed by professionals.

Funds and ETFs differ in many ways but also have many similarities. Like mutual funds, ETFs buy into various underlying securities through a brokerage account and sell them off when the market has reached a point where they’re valued. However, in contrast to mutual funds, ETFs do not provide direct access to the actual securities, but instead trade on their own behalf based on trends in the market.

Like mutual funds, ETFs require that they be purchased at a very precise time in order to be effective. Fund managers make all of the decisions on when to buy and sell, as well as the rules governing the purchase and selling of shares. This is in stark contrast to the often haphazard process of actively managed ETFs, where investors can react to changes in the market on their own, without having to wait for an official order from a fund manager. Funds and ETFs can certainly complement an investor’s portfolio, providing additional income and liquidity into the mix, but they shouldn’t form the entirety of any investor’s portfolio.