What Are Mutual Funds vs ETFs?

March 2022

Many confuse the difference between mutual funds and ETFs. They are both considered pooled fund investment vehicles which are baskets of pooled securities that create diverse portfolios. Instead of buying shares of hundreds of stocks, an investor can buy shares of a pooled fund investment vehicle that holds all of those stocks into one.

Both mutual funds and ETFs can give investors exposure to the larger market or into specific sectors. However, the main difference is that ETFs are typically passive investments while mutual funds are actively managed by fund managers.

ETF prices fluctuate throughout a trading day while orders for mutual funds occur once a day. This means that two investors can buy a share of an ETF at two different prices on the same day, but for a mutual fund, those investors would get the same price on the same day.

Some mutual funds require a minimum investment while ETFs are purchased as whole shares, so it depends on the ETF’s share price. Both do have investment fees. ETFs have an operating expense ratio which is an expense put on shareholders to continue to operate the ETF. Mutual funds can have multiple fees, such as annual operating fees and one-time shareholder fees. Some brokers also charge a fee to place a buy order for a mutual fund.

ETFs and mutual funds are taxed like any other investment, but mutual funds can have higher tax liabilities because of the capital gains distributions. Mutual funds pay out capital distributions to its shareholders which are taxable.

What are Index Funds?

March 2022

Index funds are a type of mutual fund or ETF that tries to track a market index. Some examples of index funds are the S&P 500 Index, the Russell 2000 Index, and Wilshire 5000 Total Market Index. When investing in an index fund, an investor gains exposure to a wide array of stocks within different industries. This creates a basket or pool of stocks all-in-one.

Some index funds value each stock differently within its portfolio. The weight of a stock within the index fund can be based on its market capitalization or the stock price.

Index funds are very popular with passive investors since they offer exposure to a large array of stocks across different industries. HIstorically, these index funds have performed well, and many active managers try to beat the returns of index funds, such as the S&P 500. Because of this, index funds are often the benchmark for a portfolio’s performance.

Index funds offer many advantages. Index fund portfolios are diversified which can reduce risk. Since they are not actively managed, they have low expense ratios and other fees. Overall, index funds are ideal for buy-and-hold investors, but there is not much flexibility in investing with index funds. The stocks that make up an index fund are mostly rigid and do not change too often. The investor also has no control over the weight percent of stocks within the index fund.

What Is A Stock Market Index? [S&P 500, DJIA, Russell 3000, Wilshire 5000, NASDAQ]

March 2022

Index funds are a type of mutual fund or ETF that tries to track a market index. Investors track indexes in order to gauge the state of the market. When investing in an index fund, an investor gains exposure to a wide array of stocks within different industries. This creates a basket or pool of stocks all-in-one.

There are five major US stock market indexes: S&P 500, DJIA, Russell 3000, Wilshire 5000, Nasdaq 100. Each of these indexes are made up of publicly traded U.S. companies. There are two types of indexes: capitalization-weighted and price-weighted. In capitalization-weighted indexes, the larger the stock’s market capitalization, the more the stock is weighted within the index. In a price-weighted index, the stocks with the higher price have more weight and greater impact on the index performance.

The S&P 500, or the Standard & Poor’s 500 Index, is a market index consisting of the 500 largest market capitalization U.S. companies. The S&P 500 is often referred to as the “market” due to how large and influential these 500 companies are to the economy and stock market. The S&P 500 is capitalization-weighted.

The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large companies. These thirty companies are considered blue-chip stocks. Blue chips are well-established and financially sound companies. DJIA is price-weighted.

The Russell 3000 index consists of the 3,000 largest U.S, publicly traded companies which account for 97% of all U.S. equities. The stocks that make up the index are weighted by their market capitalization. Due to how many stocks make up the index, the Russell 3000 is an indicator of the health of the broader stock market since it contains companies across many different industries.

The Wilshire 5000 index attempts to track the entire stock market. The number of stocks in the index changes over time. At its high point, the index consisted of 7,500 stocks but currently only has 3,687. Similar to the Russell 3000, the stocks are weighted by market capitalization.

The Nasdaq 100 consists of the 100-largest U.S. companies that are on the Nasdaq stock exchange. The Nasdaq 100 consists of stocks from various industries, such as financial services, healthcare, and retail. The Nasdaq 100 is traded on the stock market as Invesco QQQ Trust and is capitalization-weighted.