Mutual funds and ETFs are both investment structures that can hold a collection of securities such as stocks or bonds. However, the way investors buy, sell and interact with them can be different.
What Is a Mutual Fund?
A mutual fund pools money from multiple investors and invests according to a defined investment objective. Depending on the fund, the portfolio may include equities, debt securities or a combination of different asset classes.
Mutual fund investors generally transact with the fund at the applicable Net Asset Value, subject to the rules and timing applicable to that fund and transaction.
What Is an ETF?
An ETF, or exchange-traded fund, is an investment fund that is generally bought and sold on a stock exchange. Like a stock, its market price can change during trading hours.
Some ETFs track market indices, while others may focus on specific sectors, asset classes or investment strategies.
Mutual Fund vs ETF: Quick Comparison
| Feature | Mutual Fund | ETF |
|---|---|---|
| How it is generally traded | Transactions are generally processed through the fund structure. | Generally bought and sold on an exchange during market hours. |
| Pricing | Typically based on the applicable NAV for the transaction. | Market price can change throughout the trading session. |
| Diversification | Can provide diversified exposure depending on the fund. | Can also provide diversified exposure depending on the ETF. |
| Investment approach | May be actively managed or passively managed. | Often tracks an index, although other strategies also exist. |
| Costs | Expenses and other applicable charges can vary by fund. | Expense ratios, brokerage-related costs and other trading considerations may apply. |
| Trading flexibility | Transactions generally follow the fund's applicable dealing process. | Can generally be traded during exchange market hours. |
How Pricing Works
One of the important differences is how transactions are priced.
Mutual Fund NAV
Mutual fund transactions are generally linked to the fund's Net Asset Value, commonly called NAV. NAV reflects the value of the fund's assets minus liabilities, divided according to the applicable number of units.
ETF Market Price
ETF units trade on an exchange. Their market price can move during the trading session based on market activity, supply and demand and other factors.
Do Both Offer Diversification?
Both mutual funds and ETFs can provide diversified exposure, but diversification depends on what the particular product actually holds.
For example, a broad-market fund may hold many securities, while a narrowly focused sector product may have more concentrated exposure.
Diversification can help manage certain types of risk, but it does not guarantee profits or eliminate the possibility of losses.
Costs and Expenses
Costs are an important factor when comparing investment products. Investors may encounter different expenses depending on the structure, product and transaction method.
- Expense ratio
- Brokerage-related charges for exchange transactions where applicable
- Transaction-related costs
- Tracking differences for index-based products
- Other fund-specific or platform-related charges
Costs should be considered alongside investment objectives, risk and suitability rather than viewed in isolation.
Liquidity Considerations
ETF liquidity can depend on trading activity and the underlying market. Investors should understand that the ease of buying or selling an ETF may vary between products.
Mutual funds follow their own transaction and redemption processes. The applicable rules and timelines can differ depending on the fund and market.
Risk Is Still Important
Neither a mutual fund nor an ETF automatically makes an investment low risk. Risk depends on factors such as the underlying securities, asset allocation, market conditions, duration and concentration.
A product holding volatile assets can experience significant price movements regardless of whether it is structured as a mutual fund or an ETF.
Which One Is Better?
There is no universal answer. The appropriate choice can depend on an investor's objectives, investment horizon, understanding of the product, costs, access and personal financial circumstances.
Before making an investment decision, it is important to understand the product's documents, risks, expenses and investment objective.
Key Takeaways
- Mutual funds and ETFs can both provide access to a basket of investments.
- Mutual funds and ETFs can differ in how transactions are executed and priced.
- Both can be actively managed or passively managed depending on the product.
- Diversification depends on the underlying holdings.
- Costs, risks, liquidity and investment objectives should all be considered.
- Neither structure guarantees profits or protection from losses.