3 Differences Between an ETF and Mutual Funds

If you are thinking about investing in an ETF, mutual funds are another option that you have that works in much the same way. Although both investments are similar, they both carry a unique characteristics. Neither one of them is a perfect investment, by any stretch of the imagination. However, as part of a broader portfolio, they can both be beneficial. To help you understand the investments, here are a few differences between ETFs and mutual funds.

1. Method of Purchase

One of the biggest differences between mutual funds and ETFs is the way in which they are purchased. With a mutual fund, you order how many shares you want and then pay the net asset value of those shares at the end of the trading day. This means that you have exactly one chance per day to buy the mutual fund shares that you want. You can buy them at a bank or from any investment broker.

With an ETF, you are free to buy them at any point throughout the day. As long as the exchange is open, you can trade them. ETFs can be bought or sold on the stock exchange. You can even put an option contract on an ETF. This type of flexibility makes them more attractive than mutual funds. 

2. Costs

Another key area in which these investments typically differ is in the costs to have each one. While this is not always the case, ETFs are usually cheaper. Mutual funds are actively managed by fund managers. They may buy and sell stocks or whatever makes up the portfolio frequently. The more they do, the more they are going to charge you for doing it. Therefore, these more actively managed funds are typically a little more expensive for the investor. 

When you buy into an ETF, they are typically more passively managed. There is not a lot of action as far as buying and selling goes. When they perform fewer actions, they will charge you less as a result. You will also not typically have to pay certain fees with an ETF.

3. Dividends

The handling of dividends is another area where ETFs and mutual funds differ. Which method you prefer depends a lot on what you value. With an ETF, you are paid the dividends on the securities that you own as part of the ETF. Therefore, if the ETF owns a stock that paid dividends out during the quarter, you will receive your portion of the dividend. 

A mutual fund also receives dividends from the stocks that it invests in. However, they handle the dividends a little differently. Instead of paying it out to the mutual fund shareholders, they reinvest the dividends back into buying more securities. This helps to build the value of the mutual fund even more. 

If you prefer to receive some kind of a dividend every quarter, then the ETF may be for you. If you value the growth of the investment overall, then the mutual fund is better.

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