Understanding Stocks, Mutual Funds And ETFs
There are a lot of investment products available and a lot are difficult to understand, for the consumer with little investment knowledge. Three common products, mutual funds, exchange traded funds and equities are similar, but function very differently in a portfolio.
Other than stocks, taking a close second in any investment popularity contest is the mutual fund. Anybody with a company or government sponsored retirement portfolio has most of their money invested in these funds. Mutual funds may be popular, but theyre not well understood.
Think of a mutual fund as a collection; the collection could be stocks, bonds or nearly any product. Any fund that is actively managed has a team of managers and advisors, who attempt to beat the overall performance of the market. For the person who has little or no investment experience, mutual funds offer a professionally managed product that should make money for you, without having to monitor a complicated portfolio.
The problem with mutual funds is that after fees, a majority of stock funds underperform the stock market and this isnt new. Back to the 1960s, stock mutual fund performance has lagged the market by an average of 2%. Although many stock funds underperform the market, passively managed index funds have lower costs and closely track the performance of the market. (For additional reading, check out: Is Your Mutual Fund Safe?)
Exchange Traded Funds (ETFs)
Similar to mutual funds, exchange traded funds are often a basket of stocks, bonds or other investment products, but unlike mutual funds, ETFs are traded on the stock exchanges. More importantly, ETFs dont try to beat the market like stock mutual funds, but instead reflect the performance of an index, sector or other product. The SPDR S