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Understanding Mutual Funds And ETFs

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 bestabout 9% as well. In contrast, a blue chip
served just parking their money in a mutualmutual fund will also invest in blue chip
fund or ETF. What is the difference betweenstocks, like the ones that make up the Dow
these two types of investment options andJones 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 investornot in the Dow Jones. Thus, while the Dow
to achieve diversification. Each invests in aJones may go up 9% in a year, a blue chip
basket of stocks, so the investor generallymutual fund could have a vastly different
does not have to worry that one individualreturn. It might lose 2% or it might gain
stock will radically alter his or her15%; it just depends on the luck and the
returns. Both also give the investor theskill  of  the  mutual  fund  manager.
choice of investing in a certain sector, if
he thinks a sector will perform well. ForAs you can see, the key difference is how
example, there are mutual funds and ETFs thatthey are managed. But which one is better?
focus just on technology, and there are alsoWell, it depends. Since there are more
broader mutual funds and ETFs that focus ondecisions and more effort involved in a
the market as a whole (if you want maximummutual 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 andpeers. If the mutual fund has returns similar
ETFs are that mutual funds are activelyto 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 individualInvesting in ETFs are a little easier than a
stocks to buy and sell. He will activelymutual fund. As you can see, with an ETF, you
choose generally 50-300 stocks in which toare at least guaranteed to meet the index.
invest. In contrast, an ETF will just investWith 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 tohigh of expense fees with a mutual fund. If
track the Dow Jones index. The ETF'syour mutual fund is ripping you off, you
performance will almost exactly mirror howcertainly will underperform the market!
well the Dow Jones index does. So if the Dow



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