| Compare |
ETF Index Funds |
Mutual Funds |
|
What are they?
|
ETF index funds are baskets of stocks that track a specific index, like the S&P 500 or the Dow Jones Industrial Average. Since ETFs track existing indexes, fund managers have a limited or "passive" advisory role.
|
Most mutual funds are "actively managed" by investment
advisors that seek to achieve a specific objective
(e.g. long-term growth) as stated in the prospectus. The managers are
responsible for selecting the individual stocks
for the fund's portfolio. There are also a number of index mutual funds that
track indices like ETFs, and therefore are not actively managed.
|
|
How are they bought and sold?
|
ETF index funds are bought and sold like
stocks throughout the market day. In your
ShareBuilder 401(k) Account, ETFs are
purchased on the day your contribution is
received.
|
Shares of a mutual fund are usually traded with the fund company by way of a brokerage account. Brokerages generally allow users to choose between making standalone investments or recurring purchases on a subscription basis. Many funds also allow direct investments.
Please note, mutual funds are not available for purchase in a ShareBuilder 401(k).
|
|
How are they priced?
|
ETF index funds are priced like stocks throughout the
market day, based on market supply and demand.
|
Most mutual funds are priced at end of the market day based on Net Asset Value (NAV). After the stock market closes, the issuing company calculates a mutual fund's NAV by dividing the value of all underlying securities by the number of outstanding shares.
|
|
What are the different objectives?
|
ETF index funds seek to mirror the performance of particular stock indices like
the S&P 500 and the Dow Jones Industrial. |
Every
mutual fund has a specific objective that can be
found in the prospectus (e.g. long-term growth,
short-term income, track an index, etc.)
|
|
Are they diversified?
|
Yes. ETF index funds track entire stock indices. You can
choose two or three ETFs and get exposure
in different markets and economic sectors.
|
Yes. Mutual funds can contain dozens (if not hundreds) of stocks, which can result in exposure across different markets and sectors. |
|
How do they perform?
|
ETF index funds specifically track the performance of an
index such as the S&P 500, the NASDAQ-100 or
the Russell 2000.
|
A mutual fund's performance ultimately depends on the securities that are in its portfolio. For an actively managed fund, the performance of a fund is dependent on the selections of the fund's advisor.
|
|
What are the expense fees?
|
Since ETF index funds do not have active fund managers, they tend to have low expense ratios overall. 92% of ETFs have an expense ratio between 0.1% and 0.65%, with an average ratio of 0.39%*.
|
Since most mutual funds are actively managed, they generally have higher expense ratios than ETFs. 93% of mutual funds have an expense ratio between 0.5% and 2.5%, with an average ratio of 1.39%*. Expense ratios of index mutual funds more closely resemble those of ETFs.
|
|
How do I know what I'm buying?
|
When you invest in ETF index funds, you know what
you're investing in. Many ETFs mirror their underlying indices, the components of
which are disclosed every trading day.
Additionally, many of the ETF providers (iShares
and the American Exchange) list the holdings of
each fund along with a prospectus at their Web sites.
|
Mutual funds are required to disclose portfolio holdings to the SEC on a quarterly
basis. They must also furnish reports to shareholders on an annual and semi-annual
basis. Such reports may (but are not required to) disclose a fund's complete holdings.
Many mutual funds also display all or only principal holdings on their web sites.
|
|
* Only ETFs/mutual funds reporting an expense ratio were
considered. Source: Morningstar, Inc., March 2006.
|
