Tags: ETF, Mutual Fund, Stock, Asset, Tax, Markets, Investment, Trade

What is the difference between ETFs and Mutual Index Funds?

30 July 2020

 

 

ETF stands for an exchange-traded fund. Mutual funds and ETFs have many similarities. For instance, both enable the investors to diversify and both also consist of the mix of different assets. Join us to understand the key aspects that make them different (i.e taxes, stock exchanges, trade, markets). We hope that after this article you will be able to make an inform decision about your funds investment!

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What is an ETF? 

Simply put it is a bundle of securities (for example stocks) that you can sell or buy on a stock exchange through a brokerage firm. Consequently it can be said that these are extremely valuable for individual investors as they offer a number of benefits and can help an investor achieve their goal. Having an innovative structure may help an investor avoid short-term capital gains taxes, short markets and gain leverage. For information about how Tax Planning can help you optimize your profits and savings click here

 

Nowadays the total amount invested in various structures exceeds $1 trillion according to some estimates. Approximately one thousand ETF products are sold on stock exchanges in the USA. There are many different types of ETF products.

 

Some of them are: Bond ETFs, Commodity ETFs, Foreign market ETFs, Inverse ETFs etc. Similarly to a stock, an ETF has a ticker symbol. It can be bought or sold when the stock exchange is open. Just like a stock (however there are some differences as well).

Major similarities and differences between ETF & Mutual Funds

Difference between ETF vs Index Fund

There are a lot of similarities between the ETFs and mutual funds. Both of them enable the investors to diversify and consist of the mix of different assets. However, there are some significant differences in their management.

 

Mutual funds can be purchased based on a calculated price at the end of the day. It can be traded in a similar manner to a stock. As well as this an ETF is usually managed passively and based on a market index while the manager of the mutual fund makes active decisions about the allocation of assets within the fund.

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It also tend to have lower expense ratios and lower fees than mutual funds (due to their mostly passive management). Moreover, the minimum investment requirement is usually higher in the case of a mutual fund than in case of an ETF. The requirements differ in accordance with the company and the type of fund. In addition, because of the way ETFs are created and redeemed they are more tax efficient than mutual funds.

Types of Mutual funds and ETFs. 

 

On the other hand, there are two types of mutual funds: Open and close funds. Open mutual funds are the majority. In case of such funds companies and the investors buy and sell the fund shares directly between themselves.

 

Mutual funds do not have a limit on the number of shares they can issue. More shares are issued as more investors continue to buy the fund. Closed-end funds issue a specific number of shares. They do not issue new funds even if the investors’ demand grows.

In addition there are three legal classifications for ETFs:

  1. Exchange-Traded Open-End Index Mutual Fund. Derivatives may be used in the fund. Securities lending is permitted. Shareholders receive payment every quarter
  2. Exchange-Traded Unit Investment Trust (UIT). These must limit investments to 25% or less in a single issue. They also have to set weighing limits to both non-diversified as well as diversified funds. UITs pay dividends quarterly and do not reinvest the dividends automatically.
  3. Exchange-Traded Grantor Trust resembles a close-ended fund.  The shareholders have voting rights. Dividends are paid directly to shareholders and not reinvested.

It is a common belief that new and unusual ETFs will be introduced in the near future since innovation has always been the hallmark of this industry ever since its beginning. That being said, you should investigate, you’d like to invest in very carefully as not all of them are created equal. 

 

To conclude, both mutual funds and ETFs offer investors bundles, but they do have some differences some of which can be presented in the ETF vs Mutual Funds chart below:

etf vs mutual stocks

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Remember that EFTs are an excellent investment opportunity, it is not without risk. Kindly consult with your Financial Planner before investing, especially if you have a taxed account. For more information on exchaged-traded funds and mutual funds investments you can read this article.

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Boracchia Wiviott Wealth Partners  

Disclosure: Information presented is for educational purposes only. Investment, insurance, planning, real estate involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with a qualified insurance agent such as Boracchia Wiviott Insurance Services, LLC, a qualified financial advisor such as Boracchia Wiviott Wealth Partners, LLC, tax professional, or attorney before implementing any strategy or recommendation discussed herein.

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Lea Wiviott Boracchia, Co-Founder, FinancialPlans.Info and InvestingProfits.Pro, both apart of the renowned Boracchia Wiviott Wealth Partners

We are a registered investment advisory focused on accessible wealth planning for everyone. Our mission is to help women, men and people of all ages, races, locations, and anyone plan and secure their most successful future. We were originally established in 2005 by way of 3 firms before my husband Marc and I registered our independent advisory in California.

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