For years, mutual funds and exchange-traded funds have been cast as an either/or decision for investors. Mutual funds are expensive, stodgy, yesterday’s news. ETFs are cheap, flashy, hip to the future.
The real differences between these fund cousins, however, aren’t as stark. Yes, unlike mutual funds, ETFs trade on an exchange all throughout the day. But beyond that, ETFs are just mutual funds with a few extra features.
So, what’s the big deal? Here are answers to common questions about the two types of fund investments.
What are these funds to begin with?
Mutual funds and ETFs are both baskets of stocks, bonds or other securities that allow individual investors to participate in the market without being at the mercy of a single security. There could be a few dozen stocks in a particular fund, or thousands. Some funds merely try to match the market, so you’ll be riding along with Wall Street’s overall gains or losses, while others target specific sectors (like tech stocks), which could zoom or drop apart from the overall market. Some funds are even highly leveraged (you’ll see 2x or 3x in their names), which ramps up the risk.