Have you ever thought of investing in stocks and bonds but never had the resources to do the research? Instead of doing the analysis on your own, you can either invest in a mutual fund or an exchange traded fund (ETF) to gain exposure to hundreds and thousands of different stocks or bonds. So what exactly are mutual funds and ETFs? This article explains what they are and what they could offer to your investment portfolio.
Differences Between Mutual Funds & ETFs
Mutual funds are a selection of different stocks or bonds that either attempt to beat the market with the fund’s objectives or aim to track the performance of an index. These funds are actively or passively managed. While actively managed mutual funds rely on professional fund managers to construct a portfolio, passively managed funds either invest in all the investments of a market index or mimic the performance of a benchmark as closely as possible.
As more time, effort, and analysts are required for the research of actively managed mutual funds, they tend to be expensive. Since ETFs are purely index-trackers, they’re less expensive.
Another difference between mutual funds and ETFs are their minimum investments. Mutual funds typically come with a high minimum investment requirement. The average minimum investment for a mutual fund is between $500 to $5,000. Whereas ETFs have a minimum investment of one share.
Mutual funds are bought and sold directly from the company issuing the shares, like BlackRock and Vanguard. However, ETFs are traded on an exchange, like NASDAQ and London Stock Exchange. Since they’re traded on a stock exchange, market forces tend to determine the value of the fund. If there’s a good demand for the fund, it could be priced higher than its value. And if there’s an unexpected rush to sell the shares for the fund, it could be priced below its value.
Similarities Between Mutual Funds & ETFs
Mutual funds and ETFs come with inbuilt diversification. One fund could include many individual stocks or bonds. So if one stock or bond performs poorly, there’s a possibility that another stock or bond is doing well. This helps reduce your overall risk and losses.
Both offer a range of investment options within a market or sector. They’re a convenient way for an investor to hold shares in companies from a single country or invest in companies with a specific factor. For example, you can invest in a total stock market fund or a high-growth fund, or anywhere in between. There are plenty of options available in the market to suit your financial goals and investing style.
Both mutual funds and ETFs are managed by professional portfolio experts. They select and monitor the stocks and bonds the funds invest in, saving you time and effort.
Since both mutual funds and ETFs are a combination of stocks or bonds, they’re a good means to diversify your investment portfolio. They widen your investment across an index of stocks and bonds for the cost of just a few shares. While many investors decide between choosing to invest in mutual funds or ETFs, we prefer to take a more balanced approach to get the most out of the options.
ETFs are used to ensure our portfolios stay diversified keeping overall costs low. And mutual funds – both active and passive, ensure we have the best lot of stocks and bonds available for clients to invest in. These funds are thoroughly researched, and we believe they have the potential to deliver strong returns over the years to come.
So to answer the question, “ETFs or mutual funds?”, it’s both for us. If you’d like to invest in mutual funds and ETFs, and you don’t have the time or resources to do the research, our financial advisers at Skybound Wealth can help you achieve your long-term goals.