An ETF is an electronic-traded fund, it was created to take the best of both worlds, simplicity of an “index” mutual fund, while also be low-cost.
It also gets the flexibility of individual stocks. What that means is unlike mutual funds, you can buy and sell ETFs when the market is open. Prices you decide to buy and sell are in real-time and fluctuate quickly like individual stocks where as mutual funds – the price is determined after market closes each trading day.
There are about 1,400 ETFs on the market today.
Mutual funds are made up of hundreds or thousands of companies where one might invest in a huge assortment of these stocks, or bonds. One common example is the S&P 500 index where it takes in to account the largest 500 companies to track the performance of the stock market. Unlike ETF, mutual funds are run by a professional fund manager that makes decisions on how much to buy and sell within a fund. This is also why the expense-fees are higher.
If you have a 401k, where your contributions are automatically invested into a targeted retirement fund by date, it’s more than likely you have a mutual fund managed by a company like Vanguard or Fidelity or Charles Schwab.
Either way, ETFs and Mutual funds are very similar and their biggest advantage is the diversification of stock assets. You’re better 100% on the performance of that fund which generally represents a broader or macro sector, than an individual company. You could invest in an entirely tech focused fund than focus on one company.
Another advantage is that it saves you time, you don’t have to monitor your portfolio as closely since they decide to buy and sell at specific times. This is great for the long-term investor that wants to be passive and see their portfolio grow over the course of years or decades.
People often make the trade off between mutual funds and ETFs from the type of investing they want to do. If you want to invest small amounts of money, but often and recurring, people often choose a Mutual Fund and setup automatic contributions. Where as, if you find yourself investing a larger chunk of money at once time, and also wanting the flexibility to sell in real-time than at the closing price, they choose ETF.