7963 / What are the differences between mutual funds and ETFs?

ETFs track indexes which are, in turn, managed professionally and have teams of analysts and economists choosing the securities included in the index and the methodology for measuring the percentage of gain against base. Mutual funds pool investors’ funds and their professional managers select the securities, which the fund buys. The fund charges the investors a percentage of an investment pool for their services. This charge is called the “load.” Typically, the cost of the load for ETFs is lower than that of mutual funds. In theory, this should produce a higher yield for the individual or non-institutional investor over time. There are, however, some no-load mutual funds available.

ETFs are a much newer investment vehicle and have been available only for the last 30 years. Mutual funds have existed since the 1930s and, as a result, many have a long history with their institutional investors. For a less sophisticated investor, the process of purchasing and redeeming a mutual fund and the longer history of return that is available may be less intimidating.

ETFs appeal to sophisticated investors because they are more nimble. They can be traded throughout the day, purchased on margin, and sold short, while mutual funds cannot. ETFs also afford the individual investor access to myriad markets and asset classes.