Definition of Mutual Funds and Exchange-Traded Funds (ETFs)

1-2 Journal: Mutual Funds and ETFs
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1-2 Journal: Mutual Funds and ETFs
Definition of mutual funds and exchange-traded funds (ETFs)
American investors have options of using mutual funds or exchange-traded funds (ETFs) as investment vehicles to achieve their retirement or other forms of financial goals. According to the U.S. Securities Exchange Commission (SEC), while the two instruments share several similarities, they also have notable differences that make investors prefer one option to the other when making investment decisions (SEC, n.d). Both mutual funds and ETFs are a mix of different types of assets and offer investors ways of diversifying their investments. Nevertheless, while investors can trade ETFs intra-day, just like stocks, this option is not available for mutual funds that can only be bought at the end of each trading day based on a computed net asset value (NAV) or price. By definition, mutual funds are SEC-registered open-end investment companies pooling money from different investors to invest the money in bonds, stocks, short-term money-market instruments, including other assets or securities, or a combination of such investments (SEC, n.d). ETFs, just like mutual funds, are also SEC-registered investment companies offering investors ways of pooling their money into a fund, which then invests in bonds, stocks, other forms of assets, or a combination of such investments. In return, the investors receive interest from the investment pool. However, unlike mutual funds, ETFs do not directly sell individual shares or redeem their shares from retail investors. Instead, investors can trade ETF shares throughout the year on national stock exchanges, often at market prices that may or may not be similar to the NAV of the shares. Since both mutual funds and ETFs are not insured or guaranteed by the FDIC or other government agencies, the U.S. SEC warns that investors risk their money even when the fund will carry the bank’s name when people buy such funds through a bank.
Risks of short-term investments, stocks, and fixed income investments
Financial advi...