An Exchange Traded Fund (ETF) is another way of diversifying and managing your risk. It is similar to mutual fund since your money will be invested on different companies or industries. However, unlike the Mutual Fund, an ETF has no manager who is actively trying to increase the profit that you can get from your investment. Since there’s no active manager for an ETF, the fee is significantly less than what mutual funds incur. It is very common to see mutual funds management fee from 1 to 3 percent of your investment per year while an ETF fee is in the fraction of percent such as 0.5 percent or even less.
Since an ETF has no manager, it is considered passive investing and you are just waiting for the performance of its associated index. Also, unlike mutual funds which price can only be determined after the stock market has closed, ETF’s price is updated real time and which means that you can buy and sell it several times a day in the stock market just like a regular stock.
So which one should you choose? ETF seems to be a better option since there is very little fee, but for someone who has zero to very little knowledge in investing, Mutual Fund is not necessarily a terrible way to start especially if you are going to be guided by a competent financial adviser. But if you are already knowledgeable and have the right attitude and mindset, ETF might be a better option for you.
Even if ETF and Mutual Funds are diversified, you can still choose the level of risks you can take so you need to be aware of their composition. You need to know the level of risk of the fund you are buying in order to align it with your investment tolerance and comfort level.