Mutual funds have been around for a long time and form the foundation of a great deal of investment portfolios.
In July 2016, the assets in these funds are reaching $1,304.3 billion, according to the data of the Investment Funds Institute of Canada.
They are collective investment organizations (trust or company). Investors invests funds that are eventualy reinvested in a basket of diversifies securities of stocks or bonds. This diversification varies according to the goals of the fund and the investment style. For example, you can find fixed income securities funds or tech company stock funds.
In return for the sums invested, the investor receives shares of a fund company. You can only sell them back to this same company at their net asset value per stock.
In the beginning of the 1990s, another vehicle drawing inspiration from the mutual fund model was born and has been seeing a great surge in recent years: ETFs.
Exchange traded funds
ETFs, also collective investment organizations, leverage the advantages of mutual funds and those of stocks. Much like mutual funds, ETFs make it possible to diversify your investments, particularly according to market capitalization, a given sector of activity or an asset category.
The securities that they hold track a precise index with the same weightings, particularly the S&P 500 that replicated the very first ETF called “Spider”, a nickname given to the SPDR (Standard & Poor’s Depositary Receipts).
However, they’re traded like stocks. We can therefore buy and resell
them to the stock market at anytime of the day.
The managed assets were reaching $88.4 billion at the end of February 2016, according to the data of Daniel Straus, of the Research and strategy group on ETFs at National Bank Financial.
Although the American market remains the most important ETF market, they’ve been popping up just about everywhere in Canada over the last few years: now more than 430!
Their popularity grew thanks to iShares (ex.: the iShares S&P/TSX 60 Index Fund, the iShares S&P/TSX Capped Composite Index Fund, the iShares S&P/TSX SmallCap Index Fund) and thanks in particular to several emerging and developed countries (iShares S&P Latin America 40 Index Fund, iShares MSCI Emerging Markets Index Fund, iShares China Index Fund, iShares MSCI EAFE Index Fund, etc.).
What’s the distinction?
The main difference between mutual funds and exchange traded funds resides in the way the investor buys and sells his or her shares. With mutual funds, the purchase and sale goes through the same fund company, whereas for ETFs, these transactions are done through other investors, as would be the case, for example, for the sale of an Apple stock.
So the transactions are done through a broker, and the price is set all throughout the operating hours of a stock market. As for mutual funds, their prices are established one time based on the closing price. Another difference of mutual funds is that the management of ETF shares follows roughly the same rules as those of stocks, meaning that the investors can specify the price at which they want to perform an operation and buy or sell short.
When the time comes to choose between these two vehicles, think carefully about what you want to invest in, the tax consequences and management fees. They can have a significant impact on the return you expect from your investments…
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