Understanding the Difference Between Mutual Funds and ETFs

If you’re debating the merits of an ETF vs mutual fund, there are certain things that you should know about each option. Here’s just a quick overview on the similarities and differences between these two investment paths.


Exchange-traded funds (ETFs) are funds that track a particular index. The funds might be commodities, stocks, bonds or other kinds of assets, and the indexes that they track can be anything from currencies to precious metals.

There are three main reasons that people go for ETFs:

  1. They’re cheaper than a lot of mutual funds. If you’re unable or unwilling to put a large amount of money into the stock market, ETFs can be a way to get involved without risking excessive losses.
  2. They’re “liquid,” meaning that they can be bought and sold throughout the day. They’re a lot like stocks in the sense that their values fluctuate by the minute.
  3. They allow you to spread your money over many different investments. You can build a diversified portfolio in no time at all, and you won’t have to jump through the usual hoops to do it.

Mutual Funds

Mutual funds have been around a lot longer than ETFs. They actually dominated the market before ETFs came along. They have decades of history behind them, and there have been many books written on mutual funds and how to use them to “beat the odds.” It might be a potential area of research for you if you’ve been thinking about getting into the world of finance and investments.

As for what mutual funds actually are, they can best be described as managed portfolios of stocks or bonds. They’re overseen by a professional investment manager who can handle a lot of the burden when it comes to making decisions and assessing risks.

Mutual funds have many of the same perks as ETFs. They’re good for diversification; you can purchase them in a wide variety of industries; they’re fairly straightforward to buy, sell and trade.

One of the biggest differences between mutual funds and ETFs is that mutual funds can only be traded at the end of the day while ETFs can be traded anywhere and anytime. Some people find mutual funds stifling, but a self-imposed limit can be a good thing if you have a tendency to overtrade. It will stop you before you have a chance to get going.

As you can see, there’s a lot to consider before you decide whether to invest in mutual funds or exchange-traded funds. If you need more advice, visit a site like GOBankingRates.com. A good personal bank can help you manage your cash, stocks, bonds, investments and everything else.