In today’s complex financial marketplace, mutual funds and exchange traded funds (ETFs) offer investors a simpler, more convenient, and less time-consuming method of investing in a portfolio of securities than if investors were to trade them individually.
Mutual funds and ETFs are investment companies that pool the money of many people having similar investment objectives. Professional money managers employed by the funds use the pool of money to buy a wide range of stocks, bonds, other assets or some combination of these investments which, in the managers’ judgment, will help investors to achieve their objectives. These securities form the underlying “portfolio” of the funds.
Mutual funds and ETFs are both popular options to help investors save for retirement and other financial goals. Mutual funds and ETFs have many similarities, but they also have some important differences that may make one product or the other preferable for a particular investor.
Mutual funds and ETFs share some common features, including:
- They are U.S. Securities and Exchange Commission (SEC)-registered investment companies.
- They pool investors’ money in a professionally-managed fund that invests in stocks, bonds, or other assets.
- They can help investors achieve diversification of their investments.
Mutual funds and ETFs also differ in some important ways, such as how they are bought and sold:
- Mutual funds – Investors buy mutual fund shares through a fund itself, or through a financial intermediary (like a broker). Shares are “redeemable,” meaning that investors can sell shares back to the fund. Mutual funds are bought and sold priced at their net asset value at the close of every trading day.
- ETFs – Investors can buy and sell ETF shares throughout the day similar to buying shares of stock. ETFs trade like stocks and are bought and sold on a stock exchange, experiencing price changes throughout the day.
Select a fund with an investment objective that closely matches your own. For example, your objective may be to maximize your current income, maximize the long-term growth of capital, or achieve some combination of growth and income.
The SEC created this guide to explain the basics of mutual fund and exchange traded fund investing, how each investment option works, the fees and costs associated with each option, and how to research a particular investment.
Additional Resources:
Financial Industry Regulatory Authority (FINRA)
North American Securities Administrators Association (NASAA)