The ABC’s of Exchange Traded Funds and Traditional Mutual Funds

When an investor opens their portfolio statement, they may see both traditional mutual funds and exchange traded funds (ETFs) in their portfolio. These are common investment vehicles, yet few investors understand the differences between the two, or how a professional money manager can help them navigate the intricacies of fund options.

The similarities of the two fund types are easy: both are baskets of stocks, bonds, or other assets – and they allow investors a relatively inexpensive way to diversify their portfolios. The differences appear in how the two types of funds trade, and the breadth of their respective holdings.

Mutual funds are the elder of the two types of funds, having been around since the 18th century. Partially because these funds have been around longer, there’s a good chance an investor can find a mutual fund with at least some coverage of the market area she/she wants to invest in. For more popular investments (e.g. technology), there are many mutual funds that hold similar assets. An added nuance of mutual funds is that they only trade once per day, at the end of the trading session – regardless of what time investors hit the “buy” button! This might not sound like a big deal, but it’s akin to committing to the purchase before you know the price…not an ideal situation for any investor.

To remedy the pricing problem, the first ETF was created in 1993. While still a basket of assets, an ETF has the benefit of being traded in real-time, as opposed to just once at the end of each day. This can translate into real advantages for investors, as we’re able to select funds with the assets we want, and the price we want. Yet, because ETFs are relatively new to the investing landscape, there isn’t an ETF for everything we may want to place in an investor’s portfolio.

Add into this mix variances in transaction costs and redemption fees; allocating assets across the fund universe can become quite complex. At MCM, our clients benefit from the investment team’s expertise on fund differences, trading details, etc. and how those impact your portfolio.

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