HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
MultiBank Group information and reviews
MultiBank Group
84%

ETFs vs Mutual Funds: Similarities, Differences and the Know-Hows


Exchange-traded funds (ETFs) and mutual funds have a lot in common. These two funds both pool investor investments into a combination of securities such as bonds, commodities, and stocks. Such diversification offers exposure to investors and traders to a wide variety of asset classes. Therefore, they are popular with investors and traders, as they provide a means of diversification to their portfolios.  

In this article we will discuss both types of funds and shed light on how you can invest in mutual funds or ETFs. 

What are ETFs 

ETFs are investment vehicles that pool funds from investors to purchase a portfolio of stocks, bonds, and other securities. The phrase exchange-traded fund refers to the fact that investors can trade ETFs on stock exchanges such as the New York Stock Exchange or Nasdaq. ETFs are commonly used to track a market index such as the Standard and Poor’s (S&P) 500 Index, which tracks the stock performance of the 500 large companies listed on exchanges in the US.  

Fund companies manage these ETFs, and in exchange for the convenience of trading the ETFs, traders will pay a fee to the fund company in the form of an expense percentage or percentage of assets under management. Most ETFs are passively managed, and the expense ratio can be very low. But recently, there has been a growing number of actively managed ETFs, such as ARKK.  

What are Mutual Funds 

Mutual funds are like ETFs, where fund managers pool together the money from investors to buy a basket of stocks, bonds, and other securities. Investors then buy shares of the mutual funds directly from the company that issues the ETF, such as Vanguard. Mutual funds are often actively managed, where the fund manager will attempt to beat the market by buying and selling the securities with their expertise. The fund managers aim to help investors to potentially make greater returns. However, this would also result in a higher cost for investors as fund managers require more time and effort to research and analyse the securities being traded. It could also mean worse performance for the mutual funds if the fund managers fail at making the right decision. 

Mutual funds were generally actively managed in previous years, however, passively managed mutual funds that track the indexes are beginning to gain in popularity. 

Similarities between ETFs and Mutual Funds 

As discussed above, ETFs and Mutual Funds are similar as they both pool investors’ money together to buy a basket of stocks, bonds, and other securities for a diversified portfolio. By pooling investors’ money together, they can spread their holdings across various investment vehicles, reducing the effect that any single or class of securities has on the overall portfolio. ETF or mutual funds are a collection of hundreds or thousands of securities, investors are less affected if one security underperforms. 

Both ETFs and Mutual Funds are managed by fund managers or management companies and can be either actively or passively managed. These funds will then incur a cost but not all will have these fees. One example of such fee is management fee, a fee to compensate the people who make the decision of buying and selling for the fund. 

Difference between ETFs and Mutual Funds 

  ETFs  Mutual Funds 
How are the funds priced?  ETFs are traded on a stock exchange thus the market buying and selling will dictate the value of the fund which will change throughout the trading day.  Priced at their net asset value at the close of every trading day. 
Bid-Ask Spread  Yes, there will be a spread, as the ETFs are traded regularly like stocks.  No spread incurred, as transactions only occur at net asset value pricing. 
Trading period  Traded during the regular market hours.  Traded at the end of the trading day after the markets closes. 
Average Expense Ratio  0.16%. Example of some top ETFs with their expense ratio:   Invesco QQQ (QQQ) – 0.2% [6] SPDR S&P 500 ETF Trust (SPY) – 0.0945% [7]   0.60% and any additional fees such as management fees. 
Minimum Investment Amount  Minimum amount is the price of one lot of the ETF.  A flat amount and will not be based on the fund’s share price.  

Pros of trading ETFs and Mutual Funds 

Cons of trading ETFs and Mutual Funds 

ETFs or Mutual Funds? 

Understanding the similarities and differences between the ETFs and mutual funds will help investors get a clearer idea on whether a mutual fund or ETFs is more suitable for their investment and trading objectives. 

ETFs 

Investors looking to explore into a specific market niche without the need to research individual companies can check out thematic ETFs. These ETFs follow macro trends, and pool together a group of stocks that fall under a single theme or industry. One example of such an ETF is the ARK Innovation ETF (ARKK) which invests in the theme of disruptive innovations with the potential of changing how the world works. For investors that are looking at tax efficiency, then ETFs are generally more tax-efficient compared to mutual funds. This is due to the ETFs unique mechanism for buying and selling that allows for the purchase and sale of assets in the fund collectively. The majority of ETFs are also passively managed which then have fewer transactions because the portfolio changes only when the underlying index changes [9]. ETFs can be traded actively. Options, short selling, stop orders, limit orders and intraday trading are some of the ways active traders can make use of trading ETFs.  

Mutual Funds 

Mutual funds are mainly actively managed by a fund manager who tries to outperform the market. For investors who are looking for a fund with the potential to outperform the market, mutual fund could be an option, but it is noted that these funds typically have much higher fees and tax implications. In addition, there is no assurance that the fund managers will outperform the markets. Another reason why one might use mutual funds if they want to invest in less-efficient parts of the market. Actively managed funds have the potential to outperform in these areas due to research and proper strategy implementations.  

For investors who are looking to make regular deposits or dollar-cost averaging, a mutual fund which can be purchased in fractional shares could be a good option. It allows the investors full flexibility to invest in the same amount each transaction, whereas for ETFs, investors would need to invest in a full share which is reliant on the current market price. 

Conclusion

Both investors and traders should do their due diligence before investing or trading in either an ETF or mutual fund. As both investment funds have their own pros and cons, it’s important that you find the suitable product to fit your investment or trading objectives. For traders looking to trade CFDs on ETFs, you may start trading with Vantage where ETFs have recently been launched for all clients. Click here to get started.  

#source


RELATED

The Importance of Having a Forex Trading Plan

When approaching a field like forex trading where personal decisions translate into profits or losses, having a well-outlined and easy-to-follow plan can make the difference between success and failure...

A Guide to Trading Metals

Precious metals such as gold and silver have been recognised as valuable metals for a long time, but gold and silver are not the only ones out there for investors

Soulbound Tokens (SBTs): Pioneering Digital Identity in the Blockchain Era

Soulbound tokens (SBTs) represent a groundbreaking concept in blockchain technology, championed by Ethereum co-founder Vitalik Buterin and inspired by mechanics from the popular fantasy game...

How to Get into Online Metal Trading?

The most popular precious metals in metals trading are gold and silver. The latter is strongly linked to the main currencies and the world economy as a whole. Precious metals...

Features of Successful Oil Trading at Forex

Oil is a commodity asset of high volatility. This is a key energy carrier with stable and high demand. Also, oil can be safely called one of the most...

What are defensive stocks and why you should consider them?

The market has fallen sharply this year, and investors have seen losses. Question: Can defensive stocks help hedge against risks? What are their advantages?

Choosing a Trading Instrument: How to Trade Indices

By now, you must be familiar with the names of the world's major stock indices: Dow Jones, S&P 500, NASDAQ, DAX30... But did you know that they can...

What is Short Selling (Shorting) and How Does It Work Exactly?

You might have heard the term "shorting" a stock, referring to traders and speculators being able to create market opportunities when the price of an asset falls. There might be times when...

Ultimate guide to Chainlink trading

Chainlink aims to bring interoperability to blockchain by facilitating the seamless flow of real-world data to cryptocurrency networks. As the cryptocurrency market...

A Deep Dive into Long and Short Positions: Empowering the Modern Investor

In the ever-fluctuating world of trading, a multifaceted comprehension of long and short positions stands paramount. This profound understanding enables investors...

Ethereum trading in 2020: step-by-step guide

The Ethereum cryptocurrency is an open software platform based on blockchain technology that allows developers to create and release decentralized applications...

Online Cryptocurrency Trading: Features and Advantages

The year 2008 marked the birth of the crypto market. It was in August when the domain bitcoin.org was registered and the description (White Paper) of the cryptocurrency was published...

MultiBank Group: Spot Bitcoin ETFs: Revolutionizing Cryptocurrency Investment Landscape

The emergence of Spot Bitcoin Exchange-Traded Funds (ETFs) marks a transformative phase in cryptocurrency investment. By offering a regulated pathway to Bitcoin's price movements...

3 Tips on How to Take Advantage of Volatile Markets

What’s your first reaction when market prices suddenly go tumbling down or climb up? In any case, as a trader, you’ve probably experienced market volatility in a number of situations...

The Relationship between Gold and the USD

If you have been reading our research articles, you must have seen that our analysts very often talk about the negative correlation between gold and the US dollar...

Telcoin: The Future of the Dark Horse of Cryptos

The cryptocurrency world famously has its ups and downs, and May 19 was not a good day. However, investors remain optimistic. Most cryptocurrencies already bounced...

Exchange Traded Funds (ETF) - Meaning, Types, Benefits

ETF funds may become a good alternative to stocks for those who have just turned their attention to earning on the stock market. We have decided to find out what ETFs are worth choosing...

What is paper trading?

The term 'paper trading' comes from the stock exchange market, where investors who wanted to practice would write their investments on paper...

PAMM Account: Recovery Factor

One of the most important indicators of the reliability of the trading system used in the PAMM-account is the recovery factor. It is this factor that investors...

Maximizing Financial Gains with USDC: An In-Depth Guide to Earning Interest

In an era where traditional banking yields are diminishing, the allure of earning interest through cryptocurrencies, particularly stablecoins like USD Coin (USDC), has gained immense popularity...

XM information and reviews
XM
82%
FP Markets information and reviews
FP Markets
81%
FXTM information and reviews
FXTM
80%
AMarkets information and reviews
AMarkets
79%
Octa information and reviews
Octa
79%
BlackBull information and reviews
BlackBull
78%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.