Exchange-traded funds (ETFs) and mutual funds are both types of funds. On the face of it, they’re pretty similar with both being collections of investments (equities, bonds and alternative assets), but each of them have slightly different characteristics. We’ve pooled together some of the similarities and differences between ETFs and mutual funds.
| ETFs | Mutual funds | |
|---|---|---|
| Listed on a stock exchange? | ||
| Diversification | Medium | Medium |
| Liquidity | Liquid | Liquid |
| Type of fund | Passive | Passive |
| Investment options | Broad – commodities, sectors and indices | Narrow – indices only |
| Priced | Instantly | At the end of the day |
The minimum investment tends to be higher for mutual funds than ETFs. They tend to be £3,000 or more for mutual funds but as little as £50 for ETFs.
In general, ETFs are cheap. It is possible to buy an S&P 500 ETF for under 0.1%. This will be higher for niche areas, such as emerging markets and also for more complex ETFs, such as those with leverage. There will also be a “bid” price (the price to sell the ETF) and an “ask” price (the price to buy the ETF). In large ETFs, this will be minimal, but there can be a wider gap for smaller funds.
In contrast, actively managed funds such as mutual funds are more expensive, with expense ratios (the cost against the amount invested) between 0.5% and 0.75%. This is because an investor is paying for an experienced fund manager and their research team to uncover stocks they believe will rise.
The annual management fee can exert a significant drag on your investments over time. The difference between a £10,000 investment growing at 5% per year and 4.5% per year over 25 years is £34,813 versus £30,737. That said, a good fund manager can deliver many multiples of their fees. As such, if an investor finds a good one, it can be well worth the extra cost.
ETFs are traded on the stock market like company shares. They can be bought or sold at any time during trading hours. You pay a brokerage fee for buying and selling, plus an ongoing annual management fee.
For mutual funds, you buy and sell through an investment platform. When the holding is sold, it may take three or four days and, if the market moves in the interim, the price may be notably different.
There are great ETFs and great mutual funds and the right choice will be highly personal. There will be times in the market when one does better over the other. Equally, the right option may be a blend of the two. There are strong views on both sides, but there is no right or wrong answer.
To compare platforms that offer ETFs and mutual funds, have a look at our table.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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