Difference between etf and mutual fund
The ETF and Mutual Funds are two similar ways to invest, which offer large number of securities and many diversified portfolios. From 100 up to 3000 securities , typically make a fund. However despite the similarities these two investment types have lot of differences.
There are things that are better in ETFs and others that are better in Mutual fund, comparing them can give you better idea and male you use both.
While the ETFs are trading during the day, the mutual funds trade only at the end of the day through the net asset value – NAV. The most of the ETFs have lower operating costs, because they track particular index; compared to them the mutual funds have larger operating costs. Another advantage the ETFs have is the improvement of the return rate of your investments. The ETFs also have no minimum value of investment or sale loads, which is mark of the traditional mutual fund (which usually has both). However, the typical indexed MF don’t have sales loads at all.
Nice advantage of ETFs is that redeeming and buying shares is done by in-kind transactions, which are not considered sales, which does not trigger taxable events. The redemptions does not create tax events in ETFs, but do in mutual funds, this is why ETFs are reasonable preferred. When a “forced sale” occurs the mutual funds usually generate greater profit, but it is not that tax efficient. On the other side the tax efficiency of the ETFs is better due to “structure that allows them to substantially decrease or avoid capital gains distributions altogether”. This is one difference that can affect the overall profit rate, generated from both- mutual fund and ETFs.
In fact the differences ,may look minor to the inexperienced investor, but after a year or two he will understand that are in fact big enough to affect his winnings. The usual way is to invest in both if possible, but the ETFs are little more preferred, thanks to their ability to avoid taxes. Of course, one experienced broker or money manager can explore both and generate good profit rates from both.
The Exchange-Traded Funds offer more advantages compared to the mutual funds, that is why many investor use them, lately. Just writing down the differences show the real picture:
Trade at closing NAV
Trade during trading day
Operating expenses vary
Low operating expenses
Most have investment minimums
No investment minimums
May have sales load
No sales loads
If you consider the advantages, the mutual funds might look like less profitable and demanding, which is not the case – the MF are among the best ways to invest in long term assets, which generate between 15% and 25% for five year period. Despite the differences, as we said – the mutual funds and ETFs are two similar ways to invest and both have the same purpose – to create different portfolios and opportunities for increasing the investor’s capital.