Exchange Traded Funds (ETFs) versus Mutual Funds

If the difference between exchange traded funds (ETFs) and mutual funds seems clear as mud, you are in the right place. In this post, we will demystify the two so that you can be confident about when to use one versus the other, or why you may already own some of each.

What are ETFs and mutual funds?

ETFs and mutual funds pool the money of thousands of investors so those investors can buy a single investment, which in turn owns many individual stocks, bonds, or other securities – gaining valuable diversification without having to separately purchase the hundreds or thousands of underlying individual securities. There are other types of pooled investment vehicles, but ETFs and mutual funds are the most accessible and cost effective ways to diversify your investments in the stock and bond markets.

What is the difference?

Below are the primary ways in which ETFs and mutual funds are similar and different.

Balancing out the attributes: which is better?

Exchange traded funds and mutual funds represent excellent ways for investors to get broad diversification efficiently and at a low cost. ETFs offer a clear advantage as outlined above, which is amplified for investors such as our clients who avoid excessive trading.

While ETFs are generally superior, mutual funds are preferred in two primary instances. The first is when there is a segment of the market an investor wishes to gain exposure to, but for which no ETF exists. ETFs are newer vehicles than mutual funds, so the latter still offer coverage in more market segments. The second is if a particularly modest amount of money is at play. Investors can buy most mutual funds based upon any amount of money, even as low as $5. However, ETFs must be purchased based upon shares, and if the price per share happens to be $475, and an investor has $450, they cannot buy the ETF since the smallest increment is $475.

Though there are more intricacies than fall within the scope of this post, you are now armed with enough knowledge on the distinction between ETFs and mutual funds to impress even the professional investor at your next cocktail party. And of course, if you have additional questions about ETFs versus mutual funds, we love talking about this stuff, so please reach out to us.

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.