Exchange Traded Funds and Index Mutual Funds Compared
As they become more widely known, exchange traded funds (ETFs) are growing in popularity with investors. ETFs offer investors the ability to invest in a large and growing number of market indexes or sectors. While ETFs and index mutual funds have many similarities, they also have a number of important differences.
|Feature||ETFs||Index Mutual Funds|
|Intra-day trading:||Yes||No, orders placed during the day are executed at the close of trading|
|Diversification across a number of securities:||Yes||Yes|
|Tracks index or sector:||Yes||Yes|
|Buy on margin:||Yes||No|
|Expenses:||Brokerage fees are incurred with each transaction, and there is a spread between bid and ask prices||
May have any or all of the following:
|Tax considerations:||ETFs typically make fewer capital gains distributions||Must distribute any capital gains and dividends annually to investors, which may create a taxable event|
|Redemptions:||Must be sold through a broker||Shares may be redeemed directly with fund company|
Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.