Exchange Traded Funds (ETFs) are rapidly becoming the investing vehicle of choice. What are the pros and cons of ETFs vs mutual funds?
ETFs and mutual funds are very similar - both are a vehicle for investing where investors can pool together their money to invest in a wide variety of financial instruments. This provides for an effective way to diversify a portfolio.
However, there are some differences in the way that they’re managed and the choices available to you when investing in them.
In this article we explore the main differences between the two to help you decide which is the best investment for you.
Contents: ETFs vs mutual funds
- Similarities between ETFs & funds
- Differences between them
- Which one is right for you?
Reminder: What is an ETF?
ETF stands for Exchange Traded Fund. An ETF manager pools together funds from investors to invest in a basket of stocks, bonds and other securities. Investors can buy ETFs just like they would stocks on a stock exchange, hence the name.
The most popular ETFs track an index such as the S&P 500. Because the investing expertise needed to track an index is less than if the fund is being actively managed, the fees to invest in index ETFs are relatively low.
To learn more about ETFs, read our blog post ‘What are ETFs?
What is a mutual fund?
A mutual fund has the same underlying premise as an ETF. The fund pools investors' funds to invest in stocks, bonds and other securities. Investors buy units of the fund but can only do so once a day after the markets have closed.
Funds have traditionally been actively managed with the goal of beating a benchmark index. Investors will pay extra fees for the possibility of higher returns than the market average. However the trend of the mutual fund industry is moving towards tracker funds, also known as index funds.
To learn more about mutual funds, read our blog post ‘How do funds work?’
The similarities between ETFs and Funds
Less risky than individual stocks
Because funds invest into tens or even hundreds of different securities, it reduces the impact the one stock performing badly will have on the investment.
Lots of choice
There are lots of different ETFs and mutual funds to choose from. For example, it could be a broad and very diversified investment into the S&P 500 or it could be more focused on a specific sector or country.
Professionally managed
If you don’t have the time or inclination to make your own investment decisions, ETFs and mutual funds offer a cost-effective way for a professional to manage your investments for you.
Lower cost
Buying a share of an ETF or a unit of a mutual fund has fees, but the fee could be less than the collective cost of all the individual investments needed to replicate what’s in the fund. For example buying 500 stocks to track the S&P 500 would involve a lot of commission.
The differences between ETFs and Mutual funds
The decision whether to choose an ETF or mutual fund will likely come down to these differences:
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ETFs |
Mutual Funds |
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Management |
ETFs have become synonymous with passive investing into an index. However, active management ETFs have become more popular. |
Mutual funds are associated with active fund, where a fund manager makes discretionary investment decisions. However, index funds that track an index like index ETFs are now increasingly popular. |
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Fees |
Thanks to growing competition, fees are trending lower alongside commissions. Common to both ETFs and mutual funds is that passive index funds will normally have lower fees than actively-managed funds. |
There is no broad rule to say that either ETFs or Mutual Funds have lower fees. You should do your due diligence to check the ‘expense ratio’ as well as tax implications before you invest. FlowBank can help get you all the information you need ! |
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Trading |
ETFs trade actively throughout exchange hours with live pricing. This means all the same order types like limit and stop orders are available for trading ETFs. |
Mutual funds cannot be actively traded intraday. To buy shares in a mutual fund, you must submit an order to buy a set number of units before the market close and the units will be bought after the close at the NAV (unknown when you place the order). |
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Minimum investment |
The minimum investment into an ETF is simply the share price to buy one share of the ETF. For example if the ETF has a market price of $50, the minimum investment is $50. |
Mutual funds have a set CHF (or local currency) amount to invest in the fund, which is typically from $1000-$5000. The minimum investment is unrelated to the price of the fund. |
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Reinvestment |
You can buy new shares of an ETF at any time. With FlowBank you can arrange regular payments from your account to buy more shares. |
Automatic reinvestments can be agreed directly with the mutual fund. This can sometimes be done directly from your salary if you invest via a pension plan. |
Which is the right choice for you?
Remember that although the above points are an important consideration for which investment to make, they shouldn’t be your first consideration.
Before you decide whether an ETF or mutual fund might be best - you must always first consider the securities that are in the fund - and whether they match your investment goals and the asset mix you are trying to achieve.
There is a lot of choice of ETFs and Mutual funds across the major asset management companies - so normally you can find the ideal combination of instruments to invest in and fund type that you prefer (ETF vs mutual fund). However, if for example you were determined to invest in a niche area like Chinese electric vehicle companies and a mutual fund had a lot more assets under management and was offered by a more reputable investment company than another ETF available, it might be better to invest in the mutual fund, even if you otherwise prefer ETFs.
For questions about the many funds offered by FlowBank, please contact customer support, who are available 24/5 and happy to help.
