In contrast, when an investor decides to sell a share of a mutual fund, the fund manager may sell a portion of the fund’s security holdings in order to deliver cash in the amount of an investor’s position. This offers greater control on the timing of tax consequences. When an investor decides to sell ETF shares or individual stocks, any associated capital gains tax is paid at the time of final sale. Mutual funds may require investment minimums of $2,500 or more. 2 An investor can purchase as few as one ETF share or as many as preferred. Similar to individual stocks, with ETFs, there is no minimum investment requirement. Shareholders purchase and redeem shares at the closing net asset value of the fund. Mutual fund shares are priced once at the end of the trading day. Their cost may be slightly more or less than their net asset value (NAV). Pricing and Tradingīecause investors can buy and sell ETF shares on an exchange continuously throughout the day, like individual stocks, ETF pricing captures the current market price. ETFs now trade commission-free on many platforms, which can lower the total cost of owning an ETF. It’s important to consider the total cost of ownership (TCO) for any investment, both the expense ratio and the trading costs. Mutual fund transactions do not incur commissions, but may incur other sales charges. 1īecause ETFs and individual stocks are bought and sold on an exchange, they are both subject to a transaction fee (or commission). Historically, index ETFs have had a lower gross average expense ratio - 0.57, 1 while index mutual funds have had a higher gross average expense ratio - 0.84. Fees and Expensesīoth ETFs and mutual funds have an expense ratio, which includes management fees and the fund’s total annual operating expenses. This diversification across many securities can dilute the potential negative impact of poor performance that any one security may have, thus lowering the risk that an individual stock could hurt the portfolio’s overall performance. They provide access to many companies or investments in one single trade, removing single stock risk, or the risk inherent in being exposed to just one company. The Similarities and Differences DiversificationĮTFs and mutual funds either seek to track or try to outperform the performance of an index, such as the S&P 500® Index.
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