What is a Mutual Fund?
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. Mutual funds are priced once per day, at the Net Asset Value (NAV) calculated at the end of the trading day.
What is an Exchange-Traded Fund (ETF)?
An ETF is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can be actively managed as well. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock. This intraday tradability is a key difference from mutual funds.
Key Differences
- Trading: ETFs can be bought and sold throughout the day, while mutual funds only trade once per day.
- Management: While both can be actively managed, ETFs are more commonly passively managed, tracking a specific index (like the S&P 500). This often results in lower management fees (expense ratios).
- Minimum Investment: Mutual funds often have a minimum investment amount, whereas you can typically buy as little as one share of an ETF.