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Mutual funds
The older cousin of the ETF. Same basic idea, different plumbing, and the differences matter more than they look.
A mutual fund pools money from many investors and buys a portfolio with it. You own units in the fund rather than the underlying holdings directly.
The difference from an ETF
| Mutual fund | ETF | |
|---|---|---|
| When you trade | Once a day, after close | Any time the market is open |
| Price you get | The day's net asset value | Whatever the market quotes |
| Bought from | The fund itself | Another investor, on an exchange |
| Typical minimum | Often a set amount | The price of one share |
Structural differences. Neither is better in the abstract.
Fact
A mutual fund trades at its net asset value; an ETF need not
You buy mutual fund units from the fund at the value of its holdings, calculated once daily. An ETF trades between investors, so its price can drift slightly from the value of what it holds — usually by very little, occasionally more in stressed markets.
You buy mutual fund units from the fund at the value of its holdings, calculated once daily. An ETF trades between investors, so its price can drift slightly from the value of what it holds — usually by very little, occasionally more in stressed markets.
Active and passive
A passive fund tries to match an index. An active fund employs someone to choose holdings, aiming to beat it. The second costs considerably more, because judgement is expensive and indices are free.
The question is not whether skill exists. It is whether the skill available to you, after the fee it charges, beats the cheap alternative. See expense ratios for why that bar is higher than it first appears.
Once a day is not always a drawback
Interpretation
Not being able to trade instantly has saved investors from themselves
An ETF lets you sell during a panic at 10:42 in the morning. A mutual fund makes you wait for the close. That friction is a genuine cost when you need liquidity and a genuine benefit when what you actually need is an hour to think.
An ETF lets you sell during a panic at 10:42 in the morning. A mutual fund makes you wait for the close. That friction is a genuine cost when you need liquidity and a genuine benefit when what you actually need is an hour to think.
Check what a fund holds rather than what it is called. Fund names are marketing; the holdings list is the product.
Education, not advice. These lessons explain how things work. They do not tell you what
to buy, and Wealth Signal does not publish recommendations. Full disclaimer.