Podcast Episode 330: Understanding ETFs vs Mutual Funds
A question that many investors ask is whether they should be investing in ETFs or mutual funds. It’s a legitimate question because a lot of people don’t truly understand the difference between the two. In our latest podcast, we want to address the technical part of this question but do so with a less technical conversation.
Let’s start with a basic definition of the two. An ETF is short for exchange traded fund, and they are a new product. They haven’t been around as long as mutual funds, which most people are familiar with because they are a typical investment option in a 401k or 403b account. But when you look at it from a high level, both ETFs and mutual funds are a basket of investments.
The part that can get a little confusing for people is why would you invest in one over the other if they are both just a group of stocks and/or bonds? The main reason is mutual funds tend to carry more of a cost with them. The expense ratio is typically a little bit higher in a mutual fund rather than an ETF, even when they’re made up of similar stuff.
The reason mutual funds are still around and remain popular is because they are just offered more commonly in retirement plans. When you invest in your own IRA or an individualized plan, the ETF route is more common.
Another benefit to the ETF is that it trades on the exchange, which means you have the option to buy it throughout the day where the mutual fund will trade at the end of the day.
On the flip side, the mutual fund might be a better choice for someone just getting started because you can buy mutual fund shares. That gives someone the chance to buy into a mutual fund even if they only have $20 or $30 to invest at that time. If you want to invest in an ETF, you have to buy full shares.
For our clients, we will use both mutual funds and ETFs depending on a person’s situation, but more often than not we are moving people from mutual funds to ETFs when it helps save them on fees.
That’s a high level look at the differences between ETFs and mutual funds, and whether you want to learn more about the nuances or want to delegate it to someone, Johnson Brunetti can be helpful to you in making sure you get your retirement plan on track.
Here’s some of what we discuss in this episode:
• What is an ETF and what is a mutual fund?
• Why pick one over the other?
• What do we typically choose for our clients?
• How much do you need to understand the nuances in these products when you invest?
• Will the marketing and branding of these investments change over time?