ETF vs Mutual Funds: Which one is better for you?

ETF is one of the popular investment instruments among investors. Similar to the mutual fund, ETF is a pooled investment by many investors but it has a different structure and operation. This article will briefly explain the differences between ETFs and mutual funds, so it can help you to make an investment decision that suits you.

What are ETFs?

ETFs are exchange-traded funds that track indexes like the NASDAQ-100, S&P 500, or Dow Jones but are exchanged like stocks on a stock exchange. It is essentially a fund that behaves like an equity or a mutual that is traded on a stock exchange. ETFs have two basic components: (1) they trade on an exchange, and (2) they do not require a fund manager because they merely attempt to mimic the performance of an index by having a portfolio that represents the index’s components.

ETF vs Mutual Funds

The table below shows the distinct features between ETFs and mutual funds;

	Exchange-Traded Fund (ETF)	Mutual Fund
Diversification benefits	Yes	Yes
Transparency	More transparent	Less transparent
Fund information	Market price and trading activity data are readily available via the stock exchange or broker	Information is available from the fund manager and the fund’s appointed agent
Liquidity	Generally more liquid	Generally less liquid
Entry fee	Brokerage fee, clearing fee and stamp duty are applicable when trading on the exchange, generally lower than mutual fund	Ranges from 3%- 5% (for equity funds)
Management fee	0.4%-0.5% p.a. of the NAV	0.75%- 5% p.a. of the NAV
Purchase settlement	T+3 (if through brokers)	Upfront, usually deducted from purchase proceeds
Trading is done via	Brokers or participating dealers	Agents
Daily trading period	May change throughout the day	Fixed throughout the day

The primary advantages of exchange-traded funds (ETFs) over traditional mutual funds are quite tempting. They pay less in fees. Because it tracks the performance of an index made up of several companies, an ETF provides diversification. Buying and selling shares in a managed fund are more expensive.

In mutual funds, the manager is actively managing the fund. However, ETF follows a passive management approach, where the managers do not pick stocks based on the fundamental analysis. They simply follow the constituents of the index they are tracking.

The abovementioned comparison between ETFs and mutual funds will help investors choose their investment decision based on their risk preference.

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