In the investment world, traditional index mutual funds still dominate but the upstart exchange traded fund industry is slowing gaining ground. When it comes to “beta” indexing investments, ETFs and mutual funds are similar, yet slightly different.
“ETFs and traditional mutual funds are very similar,” Joel Dickson, a senior investment strategist at Vanguard’s investment strategy group, said in a Morningstar article. Both allow investors to access a diversified pool of assets. [Actively Managed Funds Losing Out to ETFs]
“I think the main difference is that with the mutual fund portfolio, you as the investor pretty much interact directly with the portfolio; that is, you buy and sell from the fund,” Dickson said. “With an ETF, generally the interaction is on a brokerage or an exchange, and so it is another person buying and selling shares that occurs in terms of how investors interact.”
Since investors have to go through a brokerage to buy or sell an ETF, there are some indirect cost considerations. [How to Trade ETFs Efficiently]
“You have to take a total-cost mentality in thinking about what the true cost is of the ETF, and that would be not just the ongoing expense ratio of the ETF but also any transaction costs, which would be the commission, bid-ask spread, and so forth,” Dickson said.
Nevertheless, with mutual funds, traders will get their positions executed at around 4:00 at the net asset valued while ETFs, like stocks, can be bought or sold throughout normal trading hours.