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Understanding the Differences Between Exchange-Traded Products and Mutual Funds

Understanding the Differences Between Exchange-Traded Products and Mutual Funds

Exchange-traded products allow retirement investors to pool their retirement dollars into funds that track a wide range of financial products and benchmarks. They were created as an alternative to actively-managed mutual funds, which typically have high management fees that can dilute profits for investors.


What are the main differences between ETPs and Mutual Funds?

There are a few key differences between exchange-traded products and mutual funds. Both typically consist of a basket of stocks and also potentially bonds, commodities, and precious metals. However, that’s where similarities end.

Mutual funds are comprised of a variety of stocks and bonds that are purchased for a pool of investors. Shares in professionally managed mutual funds are typically purchased from financial titans such as BlackRock and Fidelity. Investors don’t own shares of the stocks that constitute the fund but rather shares of the fund itself, and those shares can only be traded at the close of the day’s trading.

Exchange-traded products, meanwhile, are investment vehicles that are traded on public stock exchanges and can be bought and sold at any point in the trading day. ETPs typically track some type of financial index, such as the S&P 500 or the S&P Global 100. Others track asset classes such as alternatives or commodities. The most prevalent ETPs track the stocks of large market-cap companies or a blend of large-cap companies and emerging companies.

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What are the Different Types of ETPs?

ETPs are benchmarked to different indices, commodities or individual stocks. There are two types of ETPs – funds and notes – and several sub-categories within each. T

These sub-categories include:

  • Close-ended funds. Close-ended funds are pooled investment vehicles designed to raise a pre-determined amount of capital from an initial public offering before shares are listed on a public exchange.
  • Exchange-traded derivative contracts. These popular financial instruments are traded on regular exchanges. Futures and options are the most prevalent exchange-traded derivatives and are used to speculate or hedge on a wide range of commodities, currencies, and equities.
  • Exchange-traded funds. ETFs are baskets of stocks that are bought and sold through brokerage firms. There are several thousand ETFs offered on U.S. exchanges constituting everything from commodities to alternatives to foreign markets.
  • Exchange-traded notes. ETNs function like bonds. Returns are based upon a particular market index and are paid upon maturity.

Pros and Cons of ETPs

Exchange-traded products offer investors increased portfolio diversification through a range of indices and securities. They are a lower-cost alternative to actively managed mutual funds. They also provide increased liquidity since they can be bought and sold at any point in the trading day.

However, ETPs require a brokerage account that typically includes setup costs and commission fees. ETPs also can vary greatly in trading volumes, which could negatively impact investor liquidity if they invest in more niche-oriented ETP products. Prices for ETPs also can fluctuate, with market losses leading to net losses for investors.

Bottom line: Save Money and Diversify

ETPs and mutual funds offer many potential benefits for Rocket Dollar retirement investors, including increased portfolio diversification and liquidity. ETPs can save investors a great deal of money over actively managed mutual funds, and they also provide increased exposure to many different asset classes.

Rocket Dollar retirement investors can learn more about purchasing shares of ETPs and other investment vehicles by contacting our team of support experts.


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