Lesson 3 of 3 · 2 min · Funds

ETF or fund?

Two wrappers for the same basket.

Pencil drawing of two boxes, a green one marked fund and a blue one marked ETF, with the word or between them.
Open the drawn lesson

  1. An index fund can come in two wrappers. A classic mutual fund, or an ETF, short for exchange traded fund. Inside, both can hold the very same stocks.

  2. A mutual fund is bought and sold once a day, at a price set after the market closes. You place the order, and learn the exact price later.

  3. An ETF trades on the stock exchange all day, like a single share. You see the price before you buy. The first US ETF, which tracks the S&P 500, started in 1993.

  4. For a long term saver the wrapper matters less than it sounds. What matters more: which index it follows, and what it costs each year.

  5. The yearly cost is the expense ratio, sometimes called TER. Broad index funds often charge 0.2% or less. Many active funds charge 1% or more.

Quick question

Two funds follow the same index. One is an ETF at 0.07% a year, the other a mutual fund at 0.9% a year. What matters most for you over 30 years?

  • That one is an ETF
  • The difference in yearly cost
  • Which one has the nicer name
Show the answer

The difference in yearly cost

Same basket, same returns before costs. The yearly fee is the part you can control, and over decades it adds up to a lot.

Keep this one

Pick the index, then the price.

Where this comes from

SPDR S&P 500 ETF Trust, launched January 1993. Expense ratios are typical ranges; check the fact sheet of any fund you consider.