Mutual funds vs. ETFs — the difference and the role they can play in your portfolio

CNBC

a day ago

Here's our Club Mailbag email [e-mail] — so you send your questions directly to Jim Cramer and his team of analysts. We can't offer personal investing advice. We will only consider more general questions about the investment process or stocks in the portfolio or related industries. This week's first question: What is the difference between an ETF & a mutual fund? — Maxine Exchange-traded funds (ETFs) and mutual funds are common ways to invest in a diversified basket of stocks or bonds. They can be actively or passively managed. The main differences? ETFs are traded like individual stocks, and prices fluctuate during trading hours. Mutual funds must be purchased and sold directly and are priced at the end of the market day. While often tracking a benchmark index such as the S & P 500 , both ETFs and mutual funds can also be pegged to mimic the performance of sectors like technology, health care, or consumer staples. Be aware that when investing with a narrower focus, there could be additional risk given less diversification. Investors can look at a fund's prospectus, which details its investment objectives, possible risks, fees, asset composition, and performance history, to get a better idea of whether a specific fund is right for their money goals. ETFs tend to have lower expense ratios than mutual funds. That's because when investors buy mutual fund shares, there's more work that goes into managing the transaction, which leads to higher costs for the mutual fund company. According to State Street , ETFs' median expense ratio is 0.52% versus 0.91% for mutual funds. It's important to consider fund costs since they can ultimately take a bite out of overall returns. It's also worth noting that mutual funds often have minimum investment thresholds, while ETFs do not have minimum investments outside the price of each share purchased. ETFs and mutual funds are set up by professional money managers at major investment firms, offering investors an easier way to own stocks than running their own portfolios. Jim Cramer has long advocated that market beginners put their first $10,000 into an S & P 500 index mutual fund or ETF and then pick no more than five individual stocks. The Club owns 30 stocks, but Jim and two other analysts run the portfolio, backed by an entire editorial team. Jim says "buy and homework," not "buy and hold," meaning investors must actively monitor developments that could affect their investments. Jim's rule of thumb is one hour of homework per week per stock. — See here for a full list of the stocks in Jim's Charitable Trust, the portfolio used by the CNBC Investing Club. As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.