ETF vs Mutual Fund
ETF (Exchange Traded Fund) is a collective investment scheme that is freely traded in the stock exchanges much like other stocks. Typically in an ETF the value of the shares issued represent the securities value held by the fund. Mutual Funds are professionally managed funds where in the pooled resources of the investors are managed as one portfolio. Each of the investors who form the fund are entitled to a share in the assets of the fund in the ratio of their investments.
A major difference between these two types of funds is that the ETF shares cannot be exchanged for cash from the fund manager. These shares can only be sold as shares to someone who wants to buy them. However, in a Mutual Fund the fund manager would normally account for each investor’s share individually and the option to return the shares for cash to the fund manager typically is always open for the investor.
Typical investors in the ETF are institutional investors who stay invested for a long time. However, the mutual funds attract institutional as well as retail investors and are also in demand by short term investors.
The advantage of the ETF is that they are traded on the market like any other stock, hence, giving the investor all the advantages of stock markets like short selling, margin buying, etc. The user will also have the advantage of reacting to any situation during the trading hours therefore minimizing the losses in case the ETF is going down. The other advantage is that ETFs are relatively immune to the market timings. Buying or selling of ETFs has little effect on the fund value or its underlying asset value. In Mutual Funds the investors can make use of even slight variation in the price and buy or sell the funds causing greater variation in the prices. Secondly, if a user wants to get out he can only do it at the closing price and there is no way to react to any losses during the day.
Summary
1.ETF’s are freely traded like stocks on the stock exchange while Mutual Funds are professionally managed funds.
2.In ETF’s the shares are generally equal in value to the underlying assets whereas in mutual funds are managed as a single portfolio and the investors are entitled to a share in the assets of the fund in the ratio of their investments.
3.In ETF the investors enjoy all the benefits of stock market whereas in Mutual Funds this option is not available.