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