What's the Difference Between an Index Fund, an ETF, and a Mutual Fund?
5 stars based on
You may be surprised by just how similar ETFs and mutual funds really are. Just a few key differences set them apart. The biggest similarity between ETFs exchange-traded funds and mutual funds is that they both represent professionally managed collections, or "baskets," of individual stocks or bonds.
ETFs and mutual funds both come with built-in diversification. One fund could include tens, hundreds, or even thousands of individual stocks or bonds in a single fund. So if 1 stock or bond is doing poorly, there's a chance that another is doing well. That could help reduce your risk—and your overall losses. See how ETFs also help cut your costs. ETFs and mutual funds both give you access to a wide variety of U. You index mutual funds and exchange traded funds invest broadly index mutual funds and exchange traded funds example, a total market fund or narrowly for example, a high-dividend stock fund or a sector fund —or anywhere in between.
It all depends on your personal goals and investing style. ETFs and mutual funds are managed by experts. Those experts choose and monitor the stocks or bonds the funds invest in, saving you time and effort.
Although most ETFs—and index mutual funds and exchange traded funds mutual funds—are index funds, the portfolio manager is still there to make sure the fund doesn't index mutual funds and exchange traded funds from its target index.
How a fund manager is different from a personal financial advisor. Estimate the total price of your ETF trade. Mutual fund minimum initial investments aren't based on the fund's share price.
Instead, index mutual funds and exchange traded funds a flat dollar amount. Not only do ETFs provide real-time pricingthey also let you use more sophisticated order types that give you the most control over your price. If you want to keep index mutual funds and exchange traded funds simple, that's OK! Just stick with a market order. Index mutual funds and exchange traded funds get you the best current price without the added complexity.
Regardless of what time of day you place your order, you'll get the same price as everyone else who bought and sold that day. That price isn't calculated until after the trading day is over.
You can't make automatic investments or withdrawals into or out of ETFs. You can set up automatic investments and withdrawals into and out index mutual funds and exchange traded funds mutual funds based on your preferences. Learn how an active fund manager compares with a personal advisor.
You can easily split your investments between ETFs and mutual funds based on your investment goals. What about comparing ETFs vs. Comparing these and other characteristics makes good investing sense. But unfortunately it's not as easy as categorically comparing "all ETFs" to "all mutual funds.
What matters is that each invests in something completely different and, therefore, behaves differently. Usually refers to a "common stock," which is an investment that represents part ownership in a corporation, like Apple, GE, or Facebook. Represents a loan given by you—the bond's "buyer"—to a corporation or a local, state, or federal government—the bond's "issuer.
In exchange for your loan, the issuer agrees to pay you regular interest and eventually pay back the entire loan amount by a specific date. Maybe you're thinking about index mutual funds and exchange traded funds your portfolio.
Before you do, make sure you understand the costs. All examples below are hypothetical. Though sector ETFs have the potential to grow, you should be equally prepared for potentially large losses. The manager of an actively managed fund is hired by the fund to use his or her expertise to try to beat the market—or, more specifically, to beat the fund's benchmark.
A personal financial advisor, on the other hand, is hired by you to manage your personal investments, which could include actively managed funds, index funds, and other investments. How "actively" your advisor monitors your accounts or buys and sells investments—daily, weekly, monthly, etc.
A fee that a broker or brokerage company charges every time you buy or sell a security, like an ETF or individual stock. The current, real-time price at which an ETF can be bought or sold. More specifically, the market price represents the most recent price someone paid for that ETF.
You'll pay the full market price every time you buy more shares. Unlike an ETF's or a mutual fund's net asset value NAV —which is only calculated at the end of each trading day—an ETF's market price can be expected to change throughout the day.
A mutual fund doesn't have a market price because it isn't repriced throughout the day. Simply multiply the current market price by the number of shares you intend to buy or sell. With a mutual fund, you buy and sell based on dollars, not market price or shares.
With an ETF, you buy and sell based on market price—and you can only trade full shares. So you're more likely to see a dollars-and-cents amount, rather than a round figure.
The amount of money you'll need to make your first investment in a specific mutual fund. ETFs don't have minimum initial investment requirements beyond the price of 1 share. Represents the value of all of the securities and other assets held in an ETF or a mutual fund, minus its liabilities, divided by the number of outstanding shares. However, unlike an ETF's market price—which can be expected to change throughout the day—an ETF's or a mutual fund's NAV is only calculated once per day, at the end of the trading day.
Just like an individual stock, the price of an ETF can change from minute to minute throughout any trading day. The price you pay or receive can therefore change based on exactly what time you place your order.
This is sometimes referred to as "intraday" pricing. On the other hand, a mutual fund is priced only at the end of the trading day.
Regardless of what time you place your trade, you and everyone else who places a trade on the same day before the market closes that day receives the same price, whether you're buying or selling shares.
When buying and selling ETFs, you can typically choose from 4 order types—just like you would when trading individual stocks:. An order to buy or sell an ETF at the best price currently available.
In most circumstances, the trade will be completed almost immediately at a price that's close to the current quoted market price. An optional service that lets you pick a frequency—monthly, quarterly, or annually—along with a date and a dollar amount to move into or out of a specific investment on a repeat basis.
Think of this as a "set it and forget it" way to make consistent investments. For example, some investors want to make sure they max out their IRA contributions every year. But they prefer to spread the contributions over the course index mutual funds and exchange traded funds the year, and they don't want to forget a transaction by accident.
So instead of putting all the money in at once, they set up monthly or quarterly purchases that happen automatically—no logon or phone call required. An index fund buys all or a representative sample of the bonds or stocks in the index that it tracks.
An ETF or a mutual fund that attempts to beat the market—or, more specifically, to outperform the fund's benchmark. While an index fund is attempting to track a specific index, an actively managed fund employs a professional fund manager to hand-select the specific bonds or stocks that will be included in the fund in an attempt to outperform an index. So the manager's research, forecasting, expertise, and experience are critical to the fund's performance.
However, an actively managed fund can just as easily underperform its benchmark, meaning you could lose money on your investment. An ETF or a mutual fund that invests in U. Total market funds typically follow an indexing strategy—choosing a broad market index that tracks the entire bond or stock market and investing in all or a representative sample of the bonds or stocks in that index. A index mutual funds and exchange traded funds advisor is hired by you to manage your personal investments, which could include ETFs, mutual funds, individual securities, or other investments.
Some Vanguard funds have higher minimums to protect the funds from short-term trading activity. Fund-specific details are provided in each fund profile.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services we offer them commission-free or through another broker which may charge commissions. See the Vanguard Brokerage Services commission and fee schedules for limits.
Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Your use of this site signifies that you accept our terms and conditions of use Open a new browser window. Skip to main content. Search the site or get a quote. A comparison You may be surprised by just how similar ETFs and mutual funds really are. Break down the definition of an ETF.
Both offer a wide variety of investment options. At Vanguard, we offer more than 70 ETFs and mutual funds. Both are overseen by professional portfolio managers. Both are commission-free at Vanguard.
If you prefer lower investment minimums …. If you want more hands-on control over the price of your trade …. If you want to repeat specific transactions automatically ….
If you're looking for an index fund ….