| ETFs, exchange traded funds, and mutual funds | | | | ETFs are actually index funds that are managed |
| are both investor packages that manage | | | | to track an index. They trade like stocks on |
| investors' money. They are managed by | | | | major exchanges. For example, (SPY) tracks the |
| professionals for the benefit of the investors, | | | | S&P 500 stock index. There are also mutual |
| who own shares in them. This basic investor guide | | | | funds that are index funds as well, including |
| will highlight how they are similar, and how they | | | | S&P 500 index funds that track the |
| differ from each other. | | | | S&P 500 index. |
| Both ETF's and mutual funds are baskets of | | | | The difference is that ETFs are not open-ended. |
| investments. When you own shares in them, you | | | | The number of shares outstanding is fixed...similar |
| own a small part of the basket, which consists of | | | | to GE, Microsoft and other corporations whose |
| a collection (portfolio) of investments. However, | | | | stocks trade on major exchanges. Once shares |
| they work differently, and you invest in them | | | | are initially sold, the corporation (or the fund) has |
| differently. | | | | its money for operations, or to manage in the |
| Mutual funds are unique because they are | | | | case of an ETF. Then these shares trade in the |
| open-ended. They have no fixed number of | | | | market. |
| shares, and their shares are not traded on | | | | To keep our investor guide simple, when you or I |
| exchanges. When investors buy shares, their | | | | buy or sell ETF shares or shares of GE etc., we |
| money goes into the fund and is added to the | | | | are simply buying or selling existing shares as they |
| investor pool of assets to be managed by the | | | | trade in the market. We do this through the |
| mutual fund. New shares are issued to the | | | | services of a brokerage firm, and can make |
| individual investor, and the pool of assets in the | | | | transactions throughout the business day. With an |
| fund gets larger. | | | | ETF, your order to buy or sell is executed within |
| When investors want to liquidate (sell) shares, the | | | | seconds. |
| transaction again goes through the mutual fund | | | | ETFs have become very popular with active |
| company. In the process assets are taken from | | | | investors. Some track the major market indexes, |
| the pool of assets to pay the individual who is | | | | others track industries or sectors. For example, if |
| exchanging his shares for cash. Those shares then | | | | you want to invest in oil stocks, gold stocks, or |
| no longer exist, and the collective pool of assets | | | | real estate stocks, there are ETFs that track |
| becomes smaller. | | | | those sectors. If you are interested in bonds, |
| Mutual funds belong to a mutual fund family, and | | | | there are bond ETFs that track bond indexes. |
| offer investors numerous features. For example, | | | | As a basic investor guide, if you are a long-term |
| you can switch from one fund to another within | | | | investor who wants features and flexibility in your |
| the family, or you can purchase shares on a | | | | investment package, stick with mutual funds. If |
| monthly plan. If, however, you want to buy or sell | | | | you want to play the market, you need the |
| shares and need a quick transaction...they were | | | | instant liquidity of ETFs. |
| not designed to do that. | | | | |