I'm currently like 6 articles deep learning about ETFs vs Mutual Funds and I'm still completely lost - pathetic I know. Does anyone care to share some insight in laymen terms?
Some background: I just wised up and decided to open a Roth IRA with Fidelity (just rebalanced my 401k after learning more about investing). I definitely want to do a 3-4 fund portfolio with 100% (or as close to 100%) equities as possible but I'm having trouble figuring out what the differences are between ETFs and Mutual Funds. I'm not sure which one is better (I know this is subjective) but I can't really decide which one is better for me since I don't know their differences lol.
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Anyway, any help and advice is greatly appreciated!
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· 1y · edited 1y
ETF and mutual funds are both types of PACKAGING. Inside of which can go lots of different stuff. For example, consider the S&P 500. It's (basically) the 500 biggest companies in the US. If you wanted to invest in those 500 companies you could go try to buy shares in 500 different companies, but that would be really time consuming and complicated to try to get the right amount of each company.
SO, you can buy either an ETF or a mutual fund that tracks the S&P 500. (e.g. VOO is a Vanguard 500 ETF and VFINX is a Vanguard 500 mutual fund).
So inside of both of those things are the EXACT SAME THING. The same 500 companies, in the same amounts. They will grow at the same rate and provide the exact same return.
So what's different? The packaging.
If you buy the ETF version, it trades in real time, in discrete shares like a stock. So you could buy 5 shares of VOO at the share price in real time when the market is open during the day. But if you had, say $500 to invest. You would basically have to do the math on how many shares you can afford, and you'll have some cash left over.
If you buy the mutual fund version, it trades at the close of the market in dollars. So if you had the same $500 to invest and you decided to buy at noon, the purchase would go through at 4pm (close of the market) and every penny of your $500 would be invested.
As an analogy, think about buying gas. Buying an ETF is like getting pre-packaged gallon cans of gas. You can buy 5 or 6. Buying a mutual fund is like sticking the nozzle in your car and just buying what you need. No exact number of gallons needed.
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So WHAT THEY ARE isn't really subjective. Which is better is almost a moot point because they provide the same financial value. Jack Bogle preferred the mutual fund version because it's simpler (you don't have to figure out how many shares you can afford) and the lack of intraday trading encourages long term buy and hold behavior. :)
Edit: Here's a little graphic that breaks down the differences and similarities.