While more investors have become acquainted with exchange traded funds, many still do not fully understand the various nuances between the relatively new investment vehicle and traditional open-end, mutual fund products.
For starters, the Vanguard Group on Motley Fool pointed out that while mutual funds come in both actively managed passive index-based flavors, most are active in nature and try to outperform their target benchmarks. On the other hand, the majority of ETFs are index based or passively managed and only try to mirror holdings of a benchmark index.
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Mutual funds are only able to trade once a day where trade orders receive the same daily price calculated at the end of the trading day. In contrast, ETFs trade like stocks through out the day when the market is open, so potential investors have greater flexibility and control over the timing and price of their ETF investments.
Depending on what brokerage platform you patronize, the mutual fund options can vary widely. Since ETFs trade on a exchange like stocks, investors on any brokerage account can buy or sell any ETFs.
Unlike mutual funds, ETFs do not have restrictions on frequent trading, which is beneficial when conducting specific portfolio reconstruction, especially if one were to execute something like a tax loss harvesting scheme to swap around holdings over a short period.
Mutual funds typically come with a minimum investment dollar amount. ETFs, though, don’t come with minimums. ETF investors would only need to pay as much as it costs to invest in one single share of an ETF. However, ETF investors would still need to pay brokerage fees on each ETF trade, but there are some platforms that are offering zero cost or commission-free trading on specific ETFs.
“Because ETFs and mutual funds are more similar than different, focusing on your investment objective, flexibility needs and the total cost differences of either vehicle, can help you make an educated decision,” according to Vanguard.
For more information on ETFs, visit our ETF 101 category.