Mutual Fund and ETF Audits: Key Differences | BBD, LLP (2024)

FAQs

What are the key differences between ETFs and mutual funds? ›

With a mutual fund, you buy and sell based on dollars, not market price or shares. And you can specify any dollar amount you want—down to the penny or as a nice round figure, like $3,000. With an ETF, you buy and sell based on market price—and you can only trade full shares.

A major difference between the two is that ETFs can be traded intra-day like stocks, while mutual funds only can be purchased at the end of each trading day based on a calculated price known as the net asset value.

Unlike mutual funds, ETFs do not have a net asset value per share. Instead, they trade on the stock exchange and have a share price much like a stock does. Similar to a stock, ETFs are purchased in real time, whereas mutual funds are purchased at the end of the day.

Mutual funds are regulated investment products offered to the public and available for daily trading. Hedge funds are private investments that are only available to accredited investors. Hedge funds are known for using higher risk investing strategies with the goal of achieving higher returns for their investors.

ETFs have several advantages over traditional open-end funds. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs, and tax benefits.

In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges. Their value can fluctuate throughout the day in response to market conditions. This means that if the market takes a dip, the value of your ETF could drop quickly, and you could experience significant losses.

Cons of ETFs

Compared to mutual funds where investments are dollar-based, most ETFs do not offer fractional shares, meaning you must invest in whole shares no matter how much they cost. Passive management.

Stocks represent shares in individual companies while mutual funds can include hundreds — or even thousands — of stocks, bonds or other assets. You don't have to choose one or the other, though. Mutual funds and stocks can both be used in a portfolio to help you grow your wealth and meet your financial goals.

How are mutual funds different from other investments? ›

Investors buy mutual fund shares from the fund itself or through a broker for the fund, rather than from other investors. The price that investors pay for the mutual fund is the fund's per share net asset value plus any fees charged at the time of purchase, such as sales loads.

A mutual fund is a pooled investment containing many stocks and other assets within a single fund, while a stock is an investment in a single company.

Investing in equities offers freedom and helps one gain a lot of knowledge in the respective field of investment. Investing in Mutual Funds offers you to achieve your long-term goals and fund management by a professional fund manager who has the expertise and in-depth knowledge of the market.

Mutual Funds: An Overview

Some of the advantages of this kind of investment include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

Hedge funds are a special kind of private investment portfolio that uses multiple strategies for investing and managing risk in order to generate financial gains. However, exchange−traded funds (ETFs) are financial tools that seek to mimic the performance of a certain index, bond, commodity, or portfolio of assets.

Key Takeaways. Both mutual funds and ETFs hold portfolios of stocks and/or bonds and occasionally something more exotic, such as precious metals or commodities. Both can track indexes as well, however ETFs tend to be more cost effective and more liquid as they trade on exchanges like shares of stock.

The risks associated with owning ETFs are usually lower, but if an investor can take on the risk, then the dividend yields of stocks can be much higher. While you can pick the stock with the highest dividend yield, ETFs track a broader market, so the overall yield will average out to be lower.

CEFs are actively managed, whereas most ETFs are designed to track an index's performance. CEFs achieve leverage through issuance of debt and preferred shares, as well as through financial engineering. ETFs are precluded from issuing debt or preferred shares.

Market risk

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

ETFs often generate fewer capital gains for investors than mutual funds. This is partly because so many of them are passively managed and don't change their holdings that often. However, ETFs also have a structural ability, called the in-kind creation/redemption mechanism, to minimize the capital gains they distribute.

What is the greatest advantage of owning mutual funds? ›

Mutual funds give you an efficient way to diversify your portfolio, without having to select individual stocks or bonds. They cover most major asset classes and sectors.

Instead of using a portfolio manager, most ETFs are passively managed, which means securities are traded only as needed. As a result, fees tend to be lower. ETFs trade like stocks, and shares can be bought and sold continually throughout the trading day (not so for mutual funds).

Bottom Line. ETF benefits, including simplicity, low expenses and tax efficiency, make ETFs a worthwhile investment for retirement. Popular types of ETFs for retirement include dividend ETFs, fixed-income ETFs and real estate ETFs.

Neither an ETF nor an index fund is safer than the other, as it depends on what the fund owns. Stocks will always be risker than bonds, but will usually yield higher returns on investment.

ETFs expense ratios generally are lower than mutual funds, particularly when compared to actively managed mutual funds that invest a good deal in research to find the best investments. And ETFs do not have 12b-1 fees.

Is an ETF more tax-efficient than a mutual fund? In terms of capital gains and losses and dividends, tax law treats these the same for ETFs and mutual funds. However, one benefit of ETFs is that they often encounter fewer taxable events. Because ETFs trade on an exchange, they transfer from one investor to another.

Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.

Most ETFs have attractively low expenses compared to actively managed mutual funds and, to a lesser extent, passively managed index mutual funds. ETF expenses are usually stated in terms of a fund's operating expense ratio (OER).

Since ETFs are more diversified, they tend to have a lower risk level than stocks. Similar to stocks, ETFs can be bought and traded at any time and they are also taxed at short-term or long-term capital gains rates. The assets inside an ETFs are bought and pooled together by the fund's managers.

stocks. The biggest difference between mutual funds and stocks is that stocks are an investment in a single company, whereas mutual funds have many investments — meaning potentially hundreds of stocks — in a single fund.

Why are mutual funds less risky than stocks? ›

Mutual funds tend to be less risky than individual stocks, because they are more diversified — meaning they contain a mix of investments.

Mutual funds are considered safer than stocks because they have diversified portfolios and professional management. However, even a well-diversified mutual fund can lose value if the market turns down. On the other hand, individual stocks carry higher risks than mutual funds because they are not diversified.

A key difference:

ETFs are "exchange-traded" and can be bought or sold intraday at different prices. Mutual fund trades are executed once a day, at a single price.

Wider Variety. The chief advantage of mutual funds that cannot be found in ETFs is variety. There is a virtually unlimited number of mutual funds available for all different types of investment strategies, risk tolerance levels and asset types.

ETFs often generate fewer capital gains for investors than mutual funds. This is partly because so many of them are passively managed and don't change their holdings that often. However, ETFs also have a structural ability, called the in-kind creation/redemption mechanism, to minimize the capital gains they distribute.

One major reason is that it makes a fund look more attractive to new investors. Mutual funds with tax-sensitive investors are among the most likely conversion candidates because the primary advantage of an ETF is its potential to reduce, if not eliminate, capital gains distributions and the associated taxes.

Index investing pioneer Vanguard's S&P 500 Index Fund was the first index mutual fund for individual investors.