Howdy Wall Street Willy. We have talked about Mutual Funds and ETFs, but they sound very similar. Is there a difference?
Yes, there are many differences.
Can you tell me about them?
Yes, of course.
First of all, the way they are bought or sold is different. Because ETFs, just like stocks, they are bought and sold through stock brokers. But Mutual Funds can be bought from Mutual Fund companies or from brokers.
The second difference is in the way their prices change. For ETFs, they change throughout the day, just like stocks. But for MFs, the price is set at the end of each day based on its Net Asset Value or NAV.
The third difference is that the costs associated with them are different. Because for ETFs, they have commission & fees, but for Mutual Funds, they have loads & fees.
Are there any other differences?
Yes. The tax treatment, or how much tax they are charged, is also different. ETFs are more tax efficient, which means they incur less taxes. But MFs can incur capital gains taxes when investors buy and sell them, because of mandatory distribution of the capital gains at end of the year.
Also, there are holding restriction. Holding restriction is basically how long you have to hold ETFs or Mutual Funds before you sell them. For ETFs, there is no holding restriction. But for Mutual Funds, some may impose a penalty if they are sold before 1 or 6 months – depending on the MF.
And another thing is that their minimums are different. For ETFs, there are no minimums – you can invest any amount you want. But for Mutual Funds, you usually have to invest $1,000 or $2,000 – depending on the Mutual Fund.
Whoa, that’s a lot of differences! But which one to invest in – like, which one is better?
Generally speaking, you should invest in ETFs – but it depends.
If you buy and sell them frequently, or you want the costs to be lower, then choose ETFs or Exchange Traded Funds. But if you invest monthly for Dollar Cost Averaging, then some low cost Mutual Funds might be better.
Okay, thank you very much for telling me about the differences between a mutual funds and an ETF.
You’re welcome Sooper Cooper. Remember, finance is your friend!