TRAVERSE CITY — As the popularity of exchange traded funds (ETFs) has ballooned, many investors are understandably left scratching their heads about how they differ from mutual funds.
Following my explanation, interested readers may see that there is even more to the story. No doubt, for too many, the investment world is - as Churchill might say - a riddle wrapped in a mystery inside an enigma.
Before getting into the differences, let me first highlight the ways in which mutual funds and ETFs are identical.
A mutual fund is a basket of individual securities. So is an ETF. A mutual fund also can build a portfolio to include, among other investment types, exclusively stocks or just bonds or even a mix of the two. So, too, can an ETF. And, a mutual fund can be very broadly diversified or not so much. And, as you might have guessed, so can an ETF.
In the end, there is really no difference in terms of the spectrum of strategies an investor can choose with either type of fund. They are each just a portfolio of individual investments; whether it’s made up of stocks, bonds, real estate or even a mix of everything.
One big difference — an important difference — is in how you can buy or sell shares in the fund. Or, more specifically, exactly when you can buy and sell shares.
With a mutual fund, you can only buy or sell your shares at 4 p.m. At that specific time, the value of all of the investments held inside the fund is calculated and that’s your price. You might enter your trade order at 11 a.m. or 2 p.m., but the trade will take place at the price determined at 4 p.m. Think once-a-day.
In contrast, with an exchange traded fund, you can buy or sell shares all day long, just like you do with any individual stock or bond. The price is continuously set by the market — traded on a stock exchange — and the price changes throughout the day.