Mutual Funds and ETFs

Maybe you know a bit about stocks and bonds (if not, check out our previous articles!), but it’s time to move onto the next level: mutual funds and ETFs. While both of these terms may be a bit confusing, it’s not too hard to learn what they’re about, as well as understand the differences between them.

A mutual fund allows you to pool your money together with other investors to buy something you normally couldn’t afford; if a stock costs $1000 per share, but you only have $250, you can find three other investors to team up with you to purchase this $1000 stock; as it grows or declines in value, you receive the appropriate fraction of whatever you contributed. They also don’t just focus on one stock, but on a collection of many different stocks.

Meanwhile, an exchanged-traded fund (ETF) is similar to a stock; the difference here is that whereas a stock would help you buy one part of a company, an ETF helps you buy one part of many companies, usually based on a theme or grouping of some sort. Think of it this way: you can buy a stock of Apple or Microsoft, or you could buy an ETF focused on “technology”. The ETF gives you a small part of a lot of companies that are in the same sector.

Both types of funds consist of a mix of many different assets, but differ in the way they are traded and managed. ETFs can be traded like stocks multiple times throughout a day, but mutual funds can only can be purchased at the end of each day. Mutual funds are actively managed (someone calls the shots on where the money goes), and ETFs tend to be passively managed (you follow what looks good). As such, mutual funds tend to have higher fees because of the active involvement of the manager or management team.

Mutual funds fall into one of two categories: open-ended or closed-ended. With open-ended funds, the purchase and sale of fund shares takes place directly between investors and the fund company. More shares can be created to make up for the increase of people wanting to buy those shares, but it doesn’t change the value of each individual’s portion of shares. With close-ended funds, the number of shares are limited; prices are not determined by the net asset value (NAV), but are driven by investor demand. This means purchases made will usually be at a premium or discount of what it’s actually worth.
With ETFs, there are many different types; we’ll be listing some of the more popular ones below:

• Equity funds – These track different sectors or indexes, such as technology or agriculture.
• Fixed-Income funds – These focus on items that have a steady stream of income, usually bonds.
• Commodity funds – These look at raw resources, such as wood, gold, and cotton.
• Currency funds – These deal with the power/exchange rate of other currencies, as well as the US dollar.
• Real Estate funds – These are just as they sound; it looks at real estate and the price of land.
• Specialty funds – These don’t fit into one of the above categories, and can even include inverse funds that make money when a certain index is not doing well.

Whether you choose to invest in mutual funds or ETFs, it’s good to know what you’re getting into; after all, you want your money to grow, and it’s important to know how to help it reach its highest potential.