| While we all wish we could be Warren Buffet, | | | | Jones goes up 9% in a year, DIA will go up |
| the truth is that most investors are best | | | | about 9% as well. In contrast, a blue chip |
| served just parking their money in a mutual | | | | mutual fund will also invest in blue chip |
| fund or ETF. What is the difference between | | | | stocks, like the ones that make up the Dow |
| these two types of investment options and | | | | Jones index, though it may choose to invest |
| which one is for you? | | | | in only some of the stocks in the Dow Jones |
| | | | as well as other blue chip stocks that are |
| Both mutual funds and ETFs allow the investor | | | | not in the Dow Jones. Thus, while the Dow |
| to achieve diversification. Each invests in a | | | | Jones may go up 9% in a year, a blue chip |
| basket of stocks, so the investor generally | | | | mutual fund could have a vastly different |
| does not have to worry that one individual | | | | return. It might lose 2% or it might gain |
| stock will radically alter his or her | | | | 15%; it just depends on the luck and the |
| returns. Both also give the investor the | | | | skill of the mutual fund manager. |
| choice of investing in a certain sector, if | | | | |
| he thinks a sector will perform well. For | | | | As you can see, the key difference is how |
| example, there are mutual funds and ETFs that | | | | they are managed. But which one is better? |
| focus just on technology, and there are also | | | | Well, it depends. Since there are more |
| broader mutual funds and ETFs that focus on | | | | decisions and more effort involved in a |
| the market as a whole (if you want maximum | | | | mutual fund, these charge higher fees than |
| diversification). | | | | ETFs. These fees may be worth it though if |
| | | | the mutual fund can outperform its index |
| The key difference between mutual funds and | | | | peers. If the mutual fund has returns similar |
| ETFs are that mutual funds are actively | | | | to an index or worse, than the ETF will be |
| managed, whereas ETFs are passively managed. | | | | better. |
| What does this mean? Basically, mutual funds | | | | |
| have a manager that chooses which individual | | | | Investing in ETFs are a little easier than a |
| stocks to buy and sell. He will actively | | | | mutual fund. As you can see, with an ETF, you |
| choose generally 50-300 stocks in which to | | | | are at least guaranteed to meet the index. |
| invest. In contrast, an ETF will just invest | | | | With a mutual fund, you could do better or |
| in the stocks that correspond to an index. | | | | you could do much worse. One tip, more than |
| | | | any other, is to make sure you do not pay too |
| For example, the ETF Diamonds (DIA) seeks to | | | | high of expense fees with a mutual fund. If |
| track the Dow Jones index. The ETF's | | | | your mutual fund is ripping you off, you |
| performance will almost exactly mirror how | | | | certainly will underperform the market! |
| well the Dow Jones index does. So if the Dow | | | | |