Are you choosing between investing in ETFs vs. mutual funds and unclear on what’s the difference between these funds? This article will explain the similarities and differences between these common investments, and by the time you are done reading, you’ll be an index fund savant.
For over fifteen years, I have worked in ETF strategy on wall street and have dissected and traded thousands of different funds. I currently manage an investment portfolio that is heavily invested in index funds, and I must carefully consider each investment.
A mutual fund is a collection of money managed by a financial institution. This institution pools money from various investors and allocates the funds based on a pre-defined strategy. All investors in a mutual fund maintain an identical exposure and fund composition, regardless of their investment size.
– Load: “Load” refers to a sales fee or commission. The load can be charged when first purchasing the shares (front load), when redeeming/selling shares (back load), or throughout the year (level load).
Mutual funds have a clear mandate or strategy, which is defined in their summary prospectus. The fund manager (who is in charge of the fund) is obligated to execute the fund’s stated strategy. Some funds aim to track a specific index- these are known as index funds.
An index fund may track a well-known index- such as the S&P 500 or the Dow Jones Industrial Average. An index fund may also track a less common index, but what’s important is that the fund does not choose what to invest in itself, it must follow the methodology of the index it is tracking.