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