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Financial Basics

Mutual Funds and ETFs

A convenient way to diversify your portfolio

Many new investors begin investing with mutual funds and exchange-traded funds (ETFs) since you can start out with smaller investment amounts and they can help you diversify your portfolio. 1

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Understanding the difference

Mutual funds and ETFs can be an attractive alternative to investing in individual stocks, bonds or assets like real estate, which may require larger investments than you are able to make now, or limit your ability to diversify your investments.2

 

What's a Mutual Fund?

A mutual fund is a type of investment that uses pooled money from many investors to invest in stocks, bonds or other types of investments. Shareholders are able to receive income and capital gains. As the assets owned by the mutual fund appreciate or depreciate in value, so too will the value of the shares owned by the investor. Mutual funds trade at the fund’s net asset value (NAV) 3 once a day when the market closes. 

 

What's an ETF?

An ETF has characteristics similar to a mutual fund, however, ETF shares are priced continually throughout the trading day instead of at the day's close. This provides investors with greater flexibility on purchases and sales. 4

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Why is investment diversity so important?  A quick comparison:

Minimum investment

Mutual funds may require a minimum investment (e.g. $100), whereas ETFs do not.

 

Management style

Mutual Funds may be passively managed, mirroring a particular index or they may be actively managed by a fund manager that proactively seeks to exploit market inefficiencies. ETFs tend to be passively managed, reducing the amount of turnover (purchases and sales).

 

Tax consequences

Mutual fund shareholders are taxed on their share of a fund's distributions of income and capital gains, regardless of whether the distributions are received in cash or reinvested within the fund. For ETF shareholders, with trading throughout the day and no mandatory distributions of capital gains, investors may be able to better manage tax consequences.

Different types of Mutual Funds and ETFs

Stock funds

A stock fund, or equity fund, is a fund that invests in stocks, also called equity securities. Stock funds are distinguished by the issuer, how they're managed, asset style, market capitalization and specific strategies. 

Bond funds

A bond fund or debt fund is a fund that invests in bonds or other debt securities. Bond funds are distinguished by the issuer, how they're managed, the tax effect of bonds and the maturity date of the bonds.

Blended funds

Blended funds invest in stocks, bonds and other asset classes. They may target a specific asset allocation mix according to a selected time frame.

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Rewards and risks

Rewards

Mutual funds and ETFs can help you:

  • Balance your asset allocation and diversify your investments. 1, 5
  • Reduce the risk of more concentrated holdings.
  • Help safeguard your portfolio from market downturns.
  • Provide growth opportunities during market upswings.
  • Incur minimal investment commitments.
  • Incur manageable expenses through professional management.
  • Enjoy greater convenience and liquidity, as mutual funds may be traded within 24 hours, and ETFs may be traded within the same day.

 

Potential risks

  • As in any investment, the biggest risk in mutual funds and ETFs is that you can lose money.
  • Some investments are more stable than others, but you pay for that security through lower rates of return.

 

Before investing, understand potential risks and rewards of an investment to decide if it's appropriate for you.

Visit the Investing page for more information and steps to consider before making an investment.

 

A bit about fees

  • Understand how fees are assessed for a particular mutual fund or ETF before you select it.
  • Load/No-load: Funds are either sold with a "load", where you typically pay the broker a commission on your investment, or "no-load”, where you purchase without a commission. Loads may be paid at the time of purchase or sale.
  • Management fees: Fees are used to pay the fund's portfolio manager for expertise in managing the fund. They are typically lower for passively managed funds than actively managed funds.
  • Other fees: Funds may also charge 12b-1 fees for marketing, fees to maintain an account, redemption fees to discourage short-term trading, and exchange fees for moving money from one fund to another.
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