If you know a thing or two about gourmet cooking, you know that jelly and marmalade have their own distinct flavors, textures, and recipes. Kind of like the differences between mutual funds and exchange-traded funds (ETFs), you could argue.
But, as might be the case when comparing, say, bananas and plantains—which are identical in shape and size—you may also be tempted to see only the surface similarities and conclude that there are no meaningful distinctions to be made.
After all, mutual funds and ETFs each pool your money into a basket of shares, and both offer the promise of broad diversification, professional money management, and the potential for less overall risk versus individual stocks and bonds.
That said, mutual funds and ETFs are not quite the same. While the word “fund” does appear in both descriptions. ETFs are also called “exchange-traded” due to the ability to buy and sell shares any time of day. As for which investment vehicle is best for your portfolio, well, it depends.
What Type of Investor Are You?
There are important distinctions you’ll want to understand as you contemplate each product type. Trading preferences, access to asset classes, costs, transparency of underlying holdings, and your tax situation are among the areas you will need to understand to uncover your ideal investment type.
Here are some questions you’ll want to ask yourself: