Investing in ETFs and Mutual Funds
Exchange Traded Funds (ETF) and mutual funds are one of the best ways to create a diversified portfolio without needing to purchase thousands of individual investments. By understanding the investment products that are available, you can make the most of your investment and maximize your return while reducing the downside risk.
How are ETFs and mutual funds similar?
Mutual funds and ETFs act in much the same way. A pool of money is invested in many different investments then pieces of the overall portfolio are purchased and sold as shares of the fund. With one share, you own a fraction of all the fund’s investment holdings.
ETFs and mutual funds often try to track a specific index. For instance, they might try to emulate the S&P 500, international index, small cap index, or technology indices. Many of these types of funds are index funds, and carry low fees because they do not have to be as actively managed. Other funds are very specific and rather than tracking a specific segment of the economy, the fund manager makes decisions and which specific investments to purchase and how much allocation to give to each investment. These actively managed funds tend to carry higher fees because of the increased time, energy, and resources that are involved in the transactions.
How are ETFs and mutual funds different?
While there are similarities between ETFs and mutual funds, there are some differences between the two. The most significant difference is the way that they are traded. ETFs have an advantage because they are traded on the open market like a stock. Because they are always being traded, it is possible to identify the market price of an ETF any time that the market is open. In contrast, mutual funds can only be bought and sold at the end of the day. Because of this, you are unsure at what price your order will be fulfilled. It is my opinion that for passive index investing, one should use ETFs because the fees are generally very low and you always know what the price is.
Where can I invest in ETFs or Mutual Funds?
Much like stocks and bonds, most brokers should be able to help you invest in these funds. Some of the more popular brokers are Vanguard, Fidelity, and Charles Schwab. These brokers often have special commission rates for their clients which allow for reduced transaction fees for certain funds. For instance, Charles Schwab charges no transaction fee to trade their ETF funds.
Before signing up for an account or making any transactions, be sure to understand the nature of the product that you are purchasing and the fees and risks associated. Good luck as you venture deeper into the world of investing.