What is the difference between a Mutual Fund and an Exchange Traded Fund?
Both Mutual Funds and Exchange Traded Funds (ETFs) are types of investment funds.
They are similar in the sense that both pool money from multiple investors to create diverse portfolios with the intention of growing investor’s money. However, there are some key differences which are important to know when deciding which one will better meet your needs.
In the early stages of investing, it can be difficult to fully see how these differences are relevant, so here is a brief overview to get started.
ETFs allow you to invest in a sector or industry, rather than choosing to buy stocks or bonds in specific companies. Because of this, they are able to trade multiple times throughout the day following estimates of the stock market’s movements (known as a market index) in an attempt to buy at an optimal price.
A mutual fund, on the other hand, invests in multiple sectors and industries and only trades once a day, when the stock market closes, based on actual figures.
Why does this matter?
Since a mutual fund trades just once per day, it requires a professional manager to actively track and analyse the stock market in order to build the best possible portfolio for you. While ETFs passively follow a particular index, based on the sector or industry of the investment.
For this reason, fees associated with mutual funds can be higher than ETFs — since you’re paying a professional for their ongoing advice.
For example…
If part of your investment strategy is to invest in companies that promote sustainable practices, for example gender equality, you could choose a targeted socially responsible ETF that will invest your money in a variety of companies with high levels of gender diversity in leadership positions.
Alternatively, you could choose a mutual fund that invests in a diverse range of companies but specifically not tobacco, weapons or gambling.
Both options allow you to invest your money in line with your values, just in different ways.
Overall, neither type of fund is better or worse than the other. Factors such as risk and return on your investment depend more on the specific portfolio itself, rather than what type of fund you chose.
It’s more of a question of what is better for your needs and interests.
Kate Harris is a copywriter at MakeImpact, a Nordic Impact Fintech that helps individuals make sustainable investment decisions through their values.
