DB7: Mutual Funds vs ETFs https://www

What are Mutual Funds

A Mutual Funds is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates. Mutual funds are a popular choice among investors because they generally offer professional management, diversification, affordability, and liquidity. Some types of mutual funds include money market funds, bond funds, stock funds, and target date funds.

• What are ETFs

An Exchange-Traded Fund (ETF) is a basket of securities, shares of which are sold on an exchange. They combine features and potential benefits of stocks, mutual funds, or bonds. Like individual stocks, ETF shares are traded throughout the day at prices that change based on supply and demand. Like mutual fund shares, ETF shares represent partial ownership of a portfolio that's assembled by professional managers. Some types of ETFs are:

*Market ETFs: Designed to track a particular index like the S&P 500 or NASDAQ.

*Bond ETFs: Designed to provide exposure to virtually every type of bond available; US Treasury, corporate, municipal, international, high-yield and several more.

*Sector and industry ETFs: Designed to provide exposure to a particular industry, such as oil, pharmaceuticals, or high technology.

*Commodity ETFs: Designed to track the price of a commodity, such as gold, oil, or corn.

• What Hedge Funds

A hedge fund is a pooled investment structure set up by a money manager or registered investment advisor and designed to make a return. Hedge funds are alternative investments using pooled funds that employ different strategies to earn active returns, or alpha, for their investors. A hedge fund isn't a specific type of investment, but rather a vehicle for investment. Hedge funds were originally structured to hold both long and short stocks. The positions were therefore "hedged" to reduce risk, so the investors made money regardless of whether the market increased or decreased.

• How do Exchange Traded Funds (ETFs) serve investors

Making money from ETFs is essentially the same as making money by investing in mutual funds because they are operated almost identically. ETFs offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool. ETF price fluctuations will be watched by the trader, who will pick price points at which to buy and sell. The trader sets criteria on their selected trades using limit or market orders. When an ETF is purchased, a trader buys into a basket of funds rather than searching out individual stocks to purchase. If you are using a brokerage account, this can keep transaction costs down since one transaction expense is lower than multiple transactions. Because an ETF consists of securities based on many underlying investments, when they are added to a trader's portfolio, that portfolio becomes more diversified. Diversifying a portfolio is a well-known technique for reducing the overall risk involved in trading.

• How do Mutual Funds serve investors?

Mutual funds offer professional investment management and potential diversification. Also, mutual funds offer three ways to earn money:

1) Dividend Payments, where a fund may earn income from dividends on stock or interest on bonds. Then, the fund pays the shareholders nearly all the income, less expenses.

2) Capital Gains Distributions, where the price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, the fund distributes these capital gains, minus any capital losses, to investors.

3) Increased NAV (Net asset value). If the market value of a fund's portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

Mutual fund shares are redeemable, which means that investors can sell the shares back to the fund at any time.

• What are the similarities and differences?

Mutual funds and exchange-traded funds (ETFs) are both created from the concept of pooled fund investing. Both mutual funds and ETFs consist of a mix of many different assets and represent a common way for investors to diversify. As mentioned, making money from ETFs is essentially the same as making money by investing in mutual funds because they are operated almost identically.

Besides, ETFs can be traded like stocks, while mutual funds only can be purchased at the end of each trading day based on a calculated price. Mutual funds also are actively managed, meaning a fund manager makes decisions about how to allocate assets in the fund. ETFs, on the other hand, usually are passively managed and based more simply on a particular market index. In addition, another difference between the two is that ETFs are actively traded at intervals throughout a trading day while mutual funds are traded at the end of the trading day. Moreover, ETFs allow traders to trade throughout a trading day while mutual funds trade at the closing price. Finally, mutual funds typically come with a higher minimum investment requirement than ETFs.

Some sources used to answer the questions:

• Investopedia
• https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-1
• https://www.thebalance.com/making-money-from-etfs-357898