Difference between an ETF and Mutual Fund
- Mutual funds are actively managed (meaning there is a portfolio manager buying and selling securities, trying to beat the index return), while an ETF is not actively managed and has a goal of replicating an index. This means that the underlying assets of most ETFs only change during scheduled rebalancing
- ETFs trade on an exchange, just like a stock and are priced all day.
- ETFs may have a slightly different value than the Net Asset Value (NAV) of its holdings. This means that it may be possible to buy an ETF for slightly less than the value of the securities it represents.
- ETFs typically have lower management fees than mutual funds, as ETFs do not have active management.
Why should you invest in ETFs?
1. Diversification and risk management
Investors can gain exposure to an index without having to invest in all its component stocks. An ETF is comprised of many securities, therefore, it allows investors to reduce exposure to any specific company risk.
2. Time Efficient
Most investors don’t have the time or the knowledge to stock pick and track each position. With ETFs, investors can invest in a category or index that sparks their interest, pre-screened and determined by professionals.
3. Low Fees
The costs of ETFs are generally low. As ETFs are passive funds, they do not require complex portfolio analysis with regards to stock selection. The annual management fee is generally low at less than 1% compared to unit trusts or traditional funds which usually charge a management fee of 1-2%.
ETFs are as liquid as their underlying stocks. When the demand for an ETF rises in the secondary market, new shares are created and placed in the market, and vice versa
ETF fund managers publish the lists of holdings daily, making ETFs a more transparent investment option.
6. Trading flexibility
ETFs are bought and sold during the day when the markets are open. The pricing of ETF shares is continuous during normal exchange hours. Share prices vary throughout the day, based mainly on the changing intraday value of the underlying assets in the fund. ETF investors know within moments how much they paid to buy shares and how much they received after selling.
Are ETFs suitable for you?
Investing in ETFs may not be for everyone. Before you invest, make sure that you:
- Want potentially higher returns and are also prepared for variable returns which include the risk of losing a substantial part of your investment.
- Understand how returns are calculated and the factors that can affect returns.
- Understand the risks associated with investing in the stock market.
- A longer time horizon is generally preferred to ride out short-term price fluctuations