Level-up: ETFs vs. Mutual Fund

Author

My name Jeff
April 27, 2024

Listen, I get it, investing can be a real pain. It usually becomes the most painful when people start throwing acronyms around. EBITDA, CAC, ARR, IRR, ROI, YOLO, and MILF - does anyone really know what all these mean or do they just nod in nervous agreement when people say them? Is everyone just hiding behind a facade of false knowledge? Did you say MILF?

One of the most common acronyms you’ll hear in investing is ETF, the younger brother of mutual funds. ETFs, AKA exchange-traded funds, and mutual funds are “same same but different”, as David Skylark would say. 

Start slow - what is this mutual fund?

Mutual funds are basically just Splitwise for an investment account. Not helpful? Mutual funds are basically just investment accounts where a lot of people pool their money to purchase some stocks/bonds/whatever. Usually, these pools of money are professionally managed, with teams of people analyzing the markets/their crystal balls to figure out what to invest in. 

Key stats:

  • Diverse: Usually mutual funds invest in a lot of different things, which is way less risky than buying individual stocks and hoping for the best. Shoutout to everyone who dumped their life savings into Gamestop in June 2021.

  • Pros before bros: I MEAN PROFESSIONAL INVESTORS. People deciding what to buy in mutual funds usually have years of experience and can be real savants of themselves. 

  • Open to all: you can invest in these funds with pretty low amounts - just a few hundred dollars to start. 

Pros:

  • Someone smart (probably) is buying individual stocks for you, this can help you do better than the markets as a whole. 

  • Buying one mutual fund actually means buying many underlying stocks - instant diversification

Cons: 

  • Can be a little pricey because you have to pay the pros managing the funds. 

  • Can only buy or sell them at the end of the day, so if you’re in a rush, maybe not for you.

Gotcha - annnnnnd the ETF?

ETFs (say it with me, exchange-traded funds) are like mutual funds. They also pool investor money and have a bunch of underlying investments. The big difference is that, unlike mutual funds, ETFs can be traded throughout the day, just like a stock.

Key stats:

  • Trading: You can buy/sell ETFs any time during a trading day (930am-4pm) and their prices change throughout the day.

  • Lower fees, sometimes: a lot of ETFs are passive, meaning they don’t have one of those professionals deciding which individual stocks/bonds/whatevers should go in them. Because of this, they’re sometimes cheaper.

  • Transparent: All the underlying stocks/bonds/whatevers are disclosed daily, so you’ll know exactly what you’re holding. 

Pros:

  • Sell them any time… between the hours of 930am and 4pm. Those are crazy working hours. What do traders do with all their free time? Shoutout to reader MW.

  • Usually cost less than mutual funds, because so many of them are passive.

Cons:

  • Since they’re traded throughout the day, they’re more volatile than mutual funds.

  • Buying and selling them can cost you trading fees.

Get it? Got it? Good. 

Acronyms aren’t so bad, are they? ETFs are just like mutual funds: both pool money from a lot of people to buy a bunch of underlying stocks/bonds/whatevers. They both have pros and cons, and one isn’t absolutely better than the other. Now that we know what the acronym ETF means, how about we tackle MILF?

Bonus

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