ETF VS Index Funds VS Mutual Funds

What’s the difference between mutual funds, index funds and ETF? they are kind of similar but with a few difference. On this short post you’ll learn these investment differences.

ETF

ETF mean exchange traded funds, they are the youngest of the three. They are the new kid in town.

They are similar to index funds. with low fees and passively manage. They can also be similar to mutual funds actively manage with high fees. ETF gives you options to choose.

What’s the difference? with ETF you can buy or sell shares whenever the stock market is open. They are trade like a stock but there are not stocks.

Index Funds

Index funds are the second older of the three, they were invented to minimized the high fees of mutual funds. They are a type of mutual funds. They are not actively manage by professional. They are passively manage.

Since they are passively manage, this lead to much less yearly fees. we talking around 0.02% fee. Index funds allow you to look at the performance of a bunch of stock with single graph instead of looking at each individual stocks.

You can buy or sell index funds share once per day only. Index funds are designed to track index. There are many type of index funds that track the S&P 500 index. You can tell that it’s a index fund because it will say index.

Index funds have automatic reinvestment options, which make it truly passive. It can keep reinvesting the profit automatically. You can put automatic recurring investing. It allow to invest a portion of money from your checking account every month.

Mutual Funds

Mutual funds are oldest of the three, they came before ETF and Index funs. They were create to allow group of people to join and invest their money together.

Instead of investing in 90 single stocks 90 times, it allow you to invest in a group of stock for convenience. it allow you to invest 1 single time in 90 stocks, saving you time and money on fees.

By investing in group of stocks you gain diversification within the same classes of stock. Diversification minimize risk. If you have 100 different stock and one plummet, it does not affect the overall stock since you have 99 left. If each one where 1% then you just lose one percent only.

Mutual funds are the one with the highest fees since it’s active management. it’s manage by professional. they charge yearly fees of over 1%. You can tell that is a Mutual funds because it will say something like this. “Each advisor independently selects and maintains a portfolio of stocks”.

As you can see ETF, index funds and Mutual funds are kind of similar with minor differences.

Which one is best for investing? Only you can tell. Because what works for one person may not work for other. Some people enjoy to be actively managing their money other people enjoy to be passively managing their money.