Question

what are some similarities and differences between mutual funds and exchange traded funds and what are there strengths and weaknesses?

Give Example please!

Explain as if you were talking to someone with no financial background

Answer 1

Mutual Funds: A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.

Exchange Traded Funds:An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur.

Similarities between Mutual funds and ETF:

• Both are less risky than investing in individual stocks & bonds. ...
• Both offer a wide variety of investment options. ...
• Both are overseen by professional portfolio managers. ...
• Both are commission-free at Vanguard.
• Differences Between Mutual Funds and ETF:
• Mutual funds trade at the end of the day, while ETFs trade intra-day.
• Another distinction ETFs have in relation to their stock-like trading aspect is the ability to place stock orders (or market orders), which can help overcome some of the behavioral and pricing risks of day trading.
• ETFs typically have lower expense ratios than most mutual funds and can sometimes have expenses lower than index mutual funds.
• Mutual funds can be either passively-managed or actively-managed; whereas there are very few actively-managed ETFs offered today.

Strengths of Mutual Funds:

• Advanced Portfolio Management

• Dividend Reinvestment

• Risk Reduction (Safety)

• Convenience and Fair Pricing

Weaknesses of Mutual Funds:

• High Expense Ratios and Sales Charges.

• Poor Trade Execution

• Management Abuses

• Tax Inefficiency

Strengths of Exchange Traded Funds:

• Diversification

• Trades Like a Stock

• Lower Fees

• Lower Discount or Premium in Price

Weaknesses of Exchange Traded Funds:

• Intraday Pricing Might Be Overkill

• Costs Could Be Higher

• Lower Dividend Yields

• Leveraged ETF Returns Skewed