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