How Is ETF Different From Stocks and Mutual Funds?

Charlotte Miller

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If you’re looking for ways to invest and you’re torn in choosing between mutual funds or stocks, then you might want to try exchange-traded funds. It is a type of investment fund that combines the benefits of the said two popular assets. An ETF is exchanged and traded like stocks, and at the same time, you can buy and sell it at any time on any trading day. This is already a huge advantage compared to mutual funds as they are only priced at the end of the trading day.

ETFs usually have lower fees than other types of funds. They give you the freedom to buy and sell a batch of assets, and you don’t have to buy all the components of these assets individually. But like any other investment, ETFs are risky, especially when you only have little knowledge about them. So, it is important to thoroughly study and analyse before finally investing in exchange-traded funds.

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The Difference Between ETFs and Stocks

In stocks, you buy a set of assets from a company and track its price. You can keep it growing while observing its increasing price, or you can start to trade it when the price is going low. ETFs work similarly to stocks, but ETFs have a much wider range. You can buy stocks that represent a basket of assets and not just one company.

The Difference Between ETFs and Mutual Funds

One of the greatest advantages that exchange-traded funds have over mutual funds is lower fees. Who doesn’t want low fees? For example, in 2019, mutual funds had 0.52% of the average expense ratio for equity, while ETFs only had 0.18%. ETFs are more tax-efficient, which investors are always eyeing. However, in terms of availability and accessibility, mutual funds have more advantages than ETFs. Nevertheless, ETFs are still popular and continue to gain fame throughout the years, meaning it has the potential to grow more and outweigh other types of investment funds because of its increasing advantages and benefits.

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Benefits of Investing in ETF

As mentioned, ETFs are more tax-efficient than mutual funds. Selling shares often require fees that cannot be convenient for some investors because of how large the tax is. Also, you don’t need to worry about redemptions. Additionally, investors are allowed to have passive ETF investments. Actively managing funds would require more expenses. Thus, when you passively manage your ETF, you can also enjoy low expenses in general.

Trading in an ETF is flexible. You can buy and sell your shares any time of the day. You can also see and observe real-time changes in the prices of your stocks. If you choose to invest in mutual funds alone, you won’t be able to enjoy this advantage as they are only priced at the end of the day, unlike stocks. You can also use your ETF stocks for investment strategies, like selling short and buying margins.

Another great reason why you should strongly consider investing in ETFs is that there’s no minimum investment. In other investment funds like mutual funds, it requires a minimum amount of shares before you can invest in them. But what if you don’t have enough? Fortunately, in ETFs, you can invest at your price and will.

An exchange-traded fund is a type of investment fund that combines mutual funds and stocks’ best features. Its main difference from mutual funds is that you can trade at any time of a trading day. On the other hand, you can buy and sell a basket of assets from multiple companies, unlike stocks which only allow shares from a single company. Investing in an ETF is a good option because it is low on fees and expenses, flexible, and has no minimum investment.