What Is an ETF and How Does It Differ From a Mutual Fund?

19 May 2016  |  Dr. Ella Rabener
What Is an ETF and How Does It Differ From a Mutual Fund?
ETFs are an ever growing investment vehicle due to their cost, transparency and diversification.
Find out how they differ from other investment funds.

A fund whether it is a mutual fund, hedge fund or exchange traded fund (ETF) is fundamentally similar. A fund is a pool of money which, either directly or indirectly, allows individuals access to investments more easily than if the individual made the investments themselves. What really defines the type of fund in investing is how that fund is accessed and how that fund is managed. Hedge funds can be considered separately to other funds as they are less accessible to the standard retail investor, plus they tend not to be mandated as strictly as a mutual fund or ETF in terms of their investments.

Mutual funds and ETFs are entities which invest into asset classes/sectors/regions (e.g. equities/bonds, financials/pharmaceuticals, emerging markets/Europe) and then divide ownership of themselves into shares which are held by shareholders. Mutual funds and ETFs have evolved over the past few decades with both now offering passive and active investment approaches but there are some important differences between them.

Differences Between Mutual Funds and Exchange Traded Funds

 

Exchange Traded Fund (ETF)

Mutual Fund (OEIC)

Liquidity

  • ETFs can be bought/sold throughout the trading day.
  • Mutual Funds are traded once daily at the Net Asset Value.
  • ETFs are traded on exchange so can be bought/sold through brokerage accounts.
  • Mutual Funds are traded directly with the Fund.

Profit/Loss

  • Purchase price minus sell price.
  • Change in Net Asset Value.

Transparency

  • Market holdings reported daily.
  • Portfolio Holdings reported Monthly/Quarterly in hindsight.
  • Market and Net Asset Value performance disclosed.
  • Disclosure of Net Asset Value Performance
  • Live transparency on pricing via the exchange.

How Funds Have Evolved Over Time.

How Funds Have Evolved Over Time

Who are the Fund Providers?

There are many different fund providers in the market including insurance companies, banks, investment managers and more

Each individual fund has its own costs and investment approach, although these can be quite similar between providers as the fund space has become increasingly competitive. Specialist fund providers such as Vanguard (see related article –
The man behind the ETF index revolution: John C Bogle)and Blackrock iShares hold assets in the trillions of dollars with annual inflows into ETFs in the billions.

Largest Fund Providers by Market Capitalisation

Top 10 Fund Providers Globally ($ trillions at Dec 2015)

Top 10 Fund Providers Globally ($ trillions at Dec 2015)

Source: Towers Watson

At Scalable Capital we create and manage ETF portfolios for our clients. We select the “best” ETFs based on multiple qualitative and quantitative criteria to give our clients broad diversification at low cost accessing over 8,500 individual securities in 90 countries. Our clients go through an onboarding process where we understand their risk appetite and investment objectives so that we can select a portfolio tailored to them.

(1) http://www.ft.com/cms/s/0/f5e7a4ea-b61d-11e5-b147-e5e5bba42e51.html#axzz48vv2x78F

Image: Stuart Guest-Smith/ Unsplash.com

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Dr. Ella Rabener
CMO & UK CO-FOUNDER
Ella combines finance expertise, completing a doctoral degree in business and advising leading financial institutions while working with McKinsey & Company, with several years of experience building e-commerce startups, most recently as founder and CEO of Westwing.ru.