Mutual Funds Or ETFS? Understand The Differences Before You Choose

Mutual funds have been around for nearly a century. Exchange-traded funds, or ETFs, are the newer kid on the block. The two investment types have much in common, but also have important differences that make each more appropriate for certain situations.

Passive or Active

ETFs have quickly assumed a prominent place on the U.S. investment landscape. In late 2014, more than $2 trillion in net assets were held in 1,400 ETFs, up from a single offering in 1993 and fewer than 100 in 2002. Despite this growth, mutual funds remain dominant. According to the Investment Company Institute, there are nearly $16 trillion of assets owned across about 8,000 mutual funds.

There are two basic types of mutual funds: actively managed and index-based. With actively managed funds, a portfolio manager decides which securities to buy and sell to give the fund the best opportunity to outperform a benchmark index. Index funds, however, are passively managed, meaning they are