When it comes to building a diversified investment portfolio, two of the most common options investors consider are exchange-traded fund (ETFs) and mutual funds. Both of these vehicles pool money from multiple investors to buy a basket of securities such as stock or bonds, this allows for both instant diversification and professional management. This structure makes ETFs and mutual funds attractive to investors looking for a simple, cost-effective way to gain broad market exposure while reducing the risk associated with investing in individual securities.
The largest distinction between the two is how they are bought and sold. ETFs are traded on an exchange throughout the day like regular stocks. Like individual stocks, their prices fluctuate in real time based on supply and demand of the market. Mutual funds on the other hand are priced only once per day after market close, this means that all buy or sell orders are executed at a single net asset value (NAV).
For the longer term investor, mutual funds are often favored as they’re disciplined and usually have skilled professionals trading within the fund. Shorter term investors often prefer ETFs as their management fees are cheaper due to being passively managed. ETFs are also typically more tax-efficient as mutual funds can trigger taxable events that aren’t often discussed.
But what does this mean for you? We believe having a well rounded portfolio is always superior to investing heavily into one asset class. Having a mix of both ETFs and mutual funds can provide both long term growth and short term stability. What are you invested in?
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