ETF vs. Mutual Fund

Difference Between ETF and Mutual Fund

More and more people are investing their money in ETF. It was once a new investment block which attracted a small number of investors. It is giving mutual funds a run for the money. In the market, there are a large number of ETFs and mutual funds are available today. A person who is going to invest his money in one of them should have the knowledge and know the difference among them. Let us know about the differences between ETF and Mutual funds.

In mutual funds the resources of a large number of investors are combined as one portfolio. A new purchase or sale adds or subtracts from the whole value of this portfolio. The shares issued to the public reflect the security value in the fund in case of ETF. These shares can be traded freely but cannot be exchanged for cash. As one cannot get cash for his shares, there is no effect on the holdings of the portfolio. They can be sold and purchased among the investors.  Normally higher index license fees are paid in the ETFs than mutual funds.

ETF refers to Exchange Traded Funds. It is like mutual funds as many securities are combined together to make up a diversified portfolio for the investors. The trading of mutual funds is done at the end of the day at their net asset value in the market. On the other hand, ETF’s trading is done all day. One more difference is related to the operating expenses. Mutual funds have higher operating expenses then ETFs because there is no minimum investment or load of sales in mutual funds.

ETFs provide the greater tax efficiency than mutual funds. It is because of the structure of both which allows them very low capital gains. As a result ETFs appear more lucrative than mutual funds. ETFs have inherent flexibility, so passive institutional investments are made in them. They do not require any special documentation. Active traders too like it as it provides them ease of investment.

ETF’s are said to have greater tax efficiency than mutual funds because of their structure that allows them to have very low capital gains. This makes ETF’s appear as more lucrative than mutual funds. ETF’s are loved by passive institutional investors because of their inherent flexibility. They can be purchased in whichever quantity suits the investor, and do not require any special documentation, special accounts, and margin or rollover costs. As far as active traders are concerned, they love ETF because they can be traded as easily as other shares and stocks.

Mutual funds have to carry cash to handle redemptions by owners of mutual funds. ETF’s do not need to maintain cash for this purpose and thus have no cash drag.


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