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Exchange-traded funds and mutual funds may sound similar, but they do have some important differences. In this course, you'll explore the fundamentals of both investment vehicles and gain valuable insights into their structures.

ETFs and Mutual Funds Demystified

MUTUAL FUNDS

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EXCHANGE-TRADED FUNDS (ETFs)

What are ETFs and Mutual Funds?

They're usually overseen by professional money managers who choose the investments in the funds.

They often charge yearly fees called “expense ratios,” which are taken out of the money you invest.

They regularly follow a theme or category—like a sector, industry, or region.(Just like our technology example earlier.)

Both are funds that spread your money across different investments, making them more diversified than investing in a single stock.

Key Similarities between ETFs and Mutual Funds

Mutual funds trade once at the end of the day when the final price is calculated. Everyone gets the same price.

ETFs trade on an exchange, which means you can buy and sell them throughout the day. Their prices change as they’re bought and sold.

MUTUAL FUND

Trading Differences

EXCHANGE-TRADED FUND (ETF)

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Mutual funds require regular rebalancing of investments, which can lead to investors paying slightly higher taxes.

In essence, there are—in the parlance of tax professionals—fewer “taxable events” in a conventional ETF structure than in a mutual fund. (Fidelity)

MUTUAL FUND

TAX Differences

EXCHANGE-TRADED FUND (ETF)

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ETFs can be more tax efficient compared to traditional mutual funds. Generally, holding an ETF in a taxable account will generate less tax liabilities than if you held a similarly structured mutual fund in the same account.

Mutual fund managers delay sharing exactly what investments are in the fund, and instead share these details monthly or quarterly.

ETF fund managers share exactly what investments are in their fund every day, so you know when changes are made.

MUTUAL FUND

TRANSPARENCY Differences

EXCHANGE-TRADED FUND (ETF)

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Fidelity: What Are Mutual Funds?

Fidelity: EFTs 101

Plynk: What are ETFs and Mutual Funds?

Plynk: All About Funds

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Mutual Fund

A mutual fund pools money from many investors to buy a collection of stocks, bonds, and other investments.Sounds like an ETF, right? Almost, but not quite.Mutual funds do spread out your investments just like ETFs. And they, too, can be categorized based on what they invest in. But unlike stocks and ETFs, mutual funds trade once, at the end of the day. So you’ll only see the prices change after the market closes.

Exchange-Traded Fund (ETF)

ETF is short for exchange-traded fund. These allow you to invest in a mix of stocks or bonds all at once. Each ETF is like an investment bundle.ETFs also trade like stocks: You can buy and sell them throughout the day, and their prices change based on supply and demand.They’re often created to follow a theme or category—like a sector, industry, or region. So when you invest in a single ETF, your money is being spread out across a bunch of investments that fall into that category.

EXAMPLE: You might decide to invest in technology. Instead of choosing to buy stock in a single technology company, you could instead invest in a technology ETF. By investing in the technology ETF, you’re investing in many technology companies all at once, without having to pick and choose yourself.