What Makes ETFs So Different From Mutual Funds

As investors try to fill out their portfolios and save toward their golden years, many will come across open-end mutual funds and exchange traded funds, but what are the differences between the two investment vehicles?

For starters, ETFs, like their name implies, are traded on a stock exchange with intrday pricing, so share prices fluctuate the same as any other common stock, according to a FlexShares note. Since ETFs are traded like a stock, investors can also utilize limit orders to control trades or implement call options trades. In contrast, mutual funds net asset value or share price is calculated once each day after market close.

Investors are also capable of accessing their ETFs through any common stock brokerage account, whereas mutual funds may depend on distribution agreements with brokers and dealers.

However, since ETFs are priced throughout the day, potential investors should be aware of indirect costs like the bid-ask spread on buy or sell orders, along with brokerage commissions. ETFs may also be bought and sold on margin.

Additionally, there is no minimum to invest in ETFs. Investors may invest in as little as one ETF share at a time, but it is not advised to do so. Meanwhile, mutual funds usually require $1,000 to $2,500 or even higher.