| Mutual Fund | ETF | |
|---|---|---|
| Diversification | Both provide a convenient way to invest in a diversified basket of securities. May be in a specific sector (e.g. health-care stocks) or broader market (e.g. large-cap stocks, municipal bonds). | |
| Professional Management | Both managed by investment professionals to attempt to outperform (actively managed) or mimic (passively managed) a benchmark index. Most mutual funds are actively managed while most ETFs are passively managed. | |
| Operating Costs | Operating costs for Mutual Funds and ETFs include the management fee, custodial services, recordkeeping, legal expenses, accounting and marketing. The expense ratio represents these costs and provides a useful way to compare costs. | |
| Liquidity | Can be converted to cash within 1-3 days. When mutual fund shares are sold, investor has cash available typically on next business day. | When ETF shares are sold, it generally takes 3 trading days before cash becomes available. |
| Transaction Fees | May include sales loads though is not the case for funds in a Wealthstream managed portfolio. Wealthstream’s custodians charge a fee of between $0-30 for purchasing and redeeming shares depending on the fund. |
Buying and selling an ETF usually incurs a trading commission. Wealthstream’s custodians typically charge between $5-9 per trade. |
| Trading | Mutual funds in Wealthstream’s managed portfolios are open-end funds. They are bought and sold directly from the fund company at the current day’s closing price, the Net Asset Value (NAV). The NAV is the total value of all of the securities in the portfolio less any liabilities divided by the number of shares outstanding. | Traded throughout the day on a stock exchange. The price may be more or less than its NAV (see definition of NAV in panel to the left). There may be price swings during the day which can exaggerate the premium or discount to NAV. Purchasing at a premium or selling at a discount can be thought of as a hidden fee with ETFs. |
| Security Ownership | Traded throughout the day on a stock exchange. The price may be more or less than its NAV (see definition of NAV in panel to the left). There may be price swings during the day which can exaggerate the premium or discount to NAV. Purchasing at a premium or selling at a discount can be thought of as a hidden fee with ETFs. | A slightly different structure from an ETF is an exchange traded note (ETN). The ETN investor has indirect ownership of the underlying securities and though small, there is credit risk associated with the ETN sponsor to consider. Credit risk is not an issue with ETFs. |
| Transparency | Generally disclose holdings quarterly. | Generally disclose holdings quarterly. |
| Tax Efficiency | Mutual funds tend to have more capital gains taxes compared to ETFs. A mutual fund manager trades securities as part of normal operations. The amount of buying and selling is reflected in its turnover ratio and is a measurement to help compare tax efficiency. | An ETF manager can move securities in and out of the portfolio “in-kind.” They are able to control and mitigate capital gains distributions in their normal operations. This can result in less capital gains taxes compared to a mutual fund. |