Mutual funds have existed in the United States since the 1890s. Most of the first mutual funds had a set number of shares and were closed-end funds that many times traded at prices that were higher than the composite of the portfolios of stocks they had as holdings. Open-end mutual funds that had redeemable shares were first introduced on March 21, 1924. Mutual funds charge a management fee to the investors holding their assets. Mutual funds can only be bought and sold at the close and have end of day prices only. Most mutual funds are actively managed but some also just track a stock market index.
An exchange traded fund (ETF) is a trading vehicle holds a basket of assets like stocks, bonds, commodities, or currencies. The first ETF (S&P 500 SPDR) were first created on January 23, 1993. An ETF trades like a stock with a bid/ask spread throughout regular trading hours and in the pre-market and the after hours. ETFs usually have low management fees it charges to the holders of their assets.
Both mutual funds and ETFs are created of a portfolio of different types of assets and are primarily tools for diversification.
There are currently approximately more than 8,000 mutual funds and over 5,000 exchange traded funds in November 2019.
- Most mutual funds are actively managed by a manager that makes buy and sell decisions on stocks within the fund’s investment methodology with the goal to outperform the index it competes with. Most ETFs are passively managed and their goals is to track the stock market index, sector, or asset that they are trying to mirror the returns for.
- Mutual funds usually have higher management and maintenance fees than ETFs, which is due to paying the mutual fund manager fees for making portfolio decisions.
- Mutual funds can be open-ended which means the shares can be traded between investors and shares can be added or retired based on the amount of capital under management. Other mutual funds can be closed-end with the fund creating a set number of outstanding shares at the launch and not adding or subtracting shares regardless of redemption or new investor interest.
The popularity of exchange traded funds has been steadily growing for years as their lower expense ratios and ability to trade intr-day have been more appealing than the older more expensive model of a mutual fund. Another thing that has hurt actively managed mutual funds is the move to index mutual funds as the majority of managed mutual funds are unable to beat the market indexes over meaningful periods of time. Of course the next logical move from index mutual funds was to an index ETF for more entry and exit timing options.
I personally only use exchange traded funds as mutual funds have lost all their utility to me.
