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Difference Between Mutual Funds & ETFs

As seen in our previous articles, we learnt that Mutual Funds and ETFs are like very similar cousins. They are both a collective investment – a pool of money from a bunch of different investors that purchases and invests in a variety of securities.

So what are the main differences between the two? Find out below:

Mutual Funds

ETFs

1. Price is set once a day

2. Actively managed by an expert

3. Less research needed from you

4. Purchased from a broker, advisor or fund

5. Higher fees

1. Traded all day – price constantly changing

2. Managed by yourself

3. More research needed from you

4. Purchased on the stock market

5. Lower fees

It’s totally up to you to decide which one you prefer. Up until now, Mutual Funds have been more popular. Today, there are about 13 trillion dollars invested in Mutual Funds compared to 2 trillion in ETFs. However, ETFs are growing in popularity.

Which one would you invest in? Let us know in the comments below!

Investment #4 – ETFs

Victoria is an environmentalist, and is really interested in the green energy sector. Because of increasing Global Warming and other research, she believes the green energy sector will grow a lot over the next decade.

Victoria is interested in investing the little money she has in one of her favourite green companies. But the problem is… there are just too many to choose from! So, Victoria decides to invest in a green energy ETF.

ETF (exchange traded fund)

An investment fund that trades on the stock market. Just like mutual funds, it is a pool of money from different investors that purchases and invests in a variety of securities.

Just like mutual funds, ETFs invests the fund’s money into different securities (stocks, bonds, etc.), providing investors with diversification. In addition, ETFs are traded on the stock exchange, making them very easy to buy and sell.

So why would Victoria chose to invest in an ETF over other alternatives? Well, there are a variety of ETFs to choose from; some ETFs invest in stocks & bonds, some replicate the performance of an entire stock market (stock index), and others replicate the performance of a specific industry sector… In Victoria’s case, she can invest in a Green Energy ETF, which replicates the performance of all of her favourite green energy companies put together.

Overall, Victoria likes ETFs because:

  • It’s an easy way to get a diversified portfolio (less risky)
  • It’s easy to buy and sell on the stock market
  • It allows her to invest in a wide variety of investments
  • There are no management fees and very low transaction fees  

So how will this let Victoria to grow her money? When the fund’s assets (stocks, bonds, etc.) rise in value, so does the value of her ETF shares. In this case, she can sell her shares at a profit. The ETF also pays out dividends to Victoria, which is a portion of the fund’s earnings.

Of course, if the fund’s assets go down in value, so does the value of the ETF shares. Therefore, Victoria makes sure to do research in advance to ensure that the fund’s securities (companies) are good ones!

 

Which industry would you invest your money in?