ETFs Vs. Index Mutual Funds

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. First, the similarities: Both mutual funds and ETFs consist of a basket of many different individual securities pooled together.

Although there are some commission-free ETFs in the market, they might have higher expense ratios to recover expenses lost from being fee-free. There are fewer taxable events because while mutual funds often must sell securities when shares are redeemed, ETFs are simply traded between investors and no underlying assets must be sold just because shares of the ETF are sold.

With a mutual fund, you buy and sell based on dollars, not market price or shares. So be sure to read a fund's prospectus carefully to determine whether its strategy and costs may be suitable to your investment goals. Unlike with an index-based ETF, an adviser of an actively managed ETF may actively buy or sell components in the portfolio on a daily basis without regard to conformity with an index.

In 2005, Rydex Investments launched the first currency ETF called the Euro Currency Trust ( NYSE Arca : FXE ) in New York. While ETFs have many advantages, they have disadvantages as well, as does any investment. Exchange-traded funds and mutual funds are two avenues chosen by some investors to pursue diversification.

For example, an actively managed clean technology mutual fund would be comprised of stocks that the fund's analysts think will provide the best returns. This just means that most trading is conducted in the most popular funds. For example, if you prefer active instead of passive investment management, you'll probably want to choose mutual funds since all ETFs are passively managed.

This approach helps you avoid the risks that come with investing in single stocks while using the power of the stock market to grow your retirement fund. That can be a major headache for investors, being forced to make unwanted or untimely trades that could result in losses.

This fund is registered under the SEC's Investment Company Act of 1940 , whereby dividends are reinvested on the day of receipt and paid to shareholders in cash every quarter. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

With ETFs, you can trade more flexibly, as these products are traded intraday. Actively managed funds are typically more expensive than ETFs or index funds—in large part, to compensate management. So investors can buy only a few shares, which is a positive for an investing novice.

Professional management available via actively managed funds. ETFs, on the other hand, are index funds, meaning that they're passively managed and track an index, such as the S&P 500 or the Nasdaq 100. 7 factors that will help you decide between mutual funds etf vs mutual fund and ETFs.

This summary discusses only ETFs that are registered as open-end investment companies or unit investment trusts under the Investment Company Act of 1940 (the 1940 Act”). Greater Flexibility: Because ETFs are traded like stocks, you can do things with them you can't do with mutual funds, including writing options against them, shorting them and buying them on margin.