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  • What's the difference between index funds mutual funds versus ETFs. Each of these are different but similar

  • investment vehicles with their own pros and cons.

  • We hear these terms get thrown around a lot, and actually a lot of people mix them up

  • So I know it can be confusing.

  • I actually have a degree in finance

  • But I didn't even learn this stuff in school. When I invested in ETS for the first time

  • I learned later on that ETFs didn't have this one really important feature that I wanted in my investment portfolio,

  • So I had to switch over to index funds and it was all kind of a hassle.

  • I want to save you this trouble! In this video

  • I want to share everything I learned with you so that you can be more informed before making any investments of your own.

  • So if you want to learn the difference between index funds mutual funds and ETFs, and

  • Which option might make the most sense for you then keep on watching.

  • Before we get started go ahead and hit that subscribe button!

  • My channel is all about money and investing for beginners and I know it's gonna help you learn a ton.

  • So make sure to subscribe and hit the notification bell for new videos every week. So let's get right into it.

  • I'm gonna start with mutual funds because they've been around the longest.

  • Mutual funds came way before index funds and ETFs and the earliest-known mutual fund was supposedly invented way back in the

  • 1800s. They were created as a way for a bunch of people to pool their money and make investments together.

  • Mutual funds offers three major benefits:

  • the first is convenience. By investing in a mutual fund you get to own a bunch of different stocks all in one easy package. A

  • Mutual fund could have hundreds of different stocks in it

  • But you only have to make one

  • Purchase. In a world without mutual funds, if you wanted to have say a hundred different stocks in your portfolio

  • You'd have to make 100 separate purchases

  • Which means you pay trading commission a hundred times and you'd waste a lot of time sitting in front of the computer

  • Clicking the Buy button a hundred times. So inefficient, right?

  • But by investing via a mutual fund you get instant ownership in all the stocks the mutual fund already

  • Owns. And owning a lot of stocks all at once gives you diversification, which is the second major benefit of mutual funds.

  • Diversification is a strategy that reduces your investing risk by spreading out your eggs. Instead of having all your money in one stock

  • Which is the equivalent of putting all your eggs in one basket you

  • Spread out your money of across many different stocks. That way if one of the stocks in the mutual fund totally crashes

  • you'll still be fine, because each stock is only a small portion of your overall portfolio. Mutual funds typically consist of around

  • 90 stocks at a minimum,

  • So they provide a lot of diversification that would be hard to replicate on your own.

  • The third benefit of mutual funds is that they're managed by investment professionals.

  • So rather than try to find stocks on your own, you have some super smart guy who

  • Supposedly knows what he's doing pick the stocks for you. So mutual funds offer convenience,

  • diversification, and access to professional money managers.

  • But that doesn't mean mutual funds are 100 percent amazing. Convenience and diversification are definitely good benefits

  • But the problem with having professional fund managers is that they charge a lot of fees. When some really smart well-educated

  • Professional is picking the stocks for your mutual fund, that's called "active management". In return for managing your money

  • actively managed mutual funds charge an annual fee of one to two percent of your account balance every year. So at 2% if you invested

  • $10,000 in a mutual fund,

  • $200 of that goes straight into the fund managers pocket. And even if the manager makes poor investment decisions and your account balance actually goes

  • Down next year, you still get charged 2%. So you could literally end up with less money than you started with

  • But the fund manager would still get paid millions of dollars for their services.

  • And even if you find a fund manager who's done really well for a couple of years

  • Their performance usually doesn't last over the long run, and the cost of fees can really add up.

  • Over the years fees will reduce your nest egg by hundreds of thousands of dollars.

  • So the vast

  • Majority of mutual funds are totally not worth the high fees. Then came the index fund. One day a guy named Jack Bogle

  • Got so sick of mutual funds ripping people off that he invented a whole new category of mutual funds called

  • Index funds. And index fund totally revolutionized the investing landscape. Unlike traditional mutual funds,

  • Index funds are passively managed.

  • This means that rather than paying an expensive fund manager to do active management,

  • The fund follows a fixed formula that totally eliminates the need for someone to make buying and selling decisions.

  • The formula that it follows is based on an index, and that's where the term index fund comes from. An index is a

  • Representative sample of the stock market and indexes were created as a tool to quickly measure stock market performance.

  • Rather than looking up thousands of stocks individually, an

  • Index is just one simple thing

  • You can look up to just see how the stock market did that day.

  • If you're not sure what a stock market index is, then make sure to check out this video right here for an in-depth explanation.

  • So Jack Bogle created the first index fund in the

  • 1970s, and it mirrored the the S&P 500 index which is one of the most widely followed indexes in the world.

  • Since the fund simply buys whatever stocks are in the S&P 500 index,

  • The fees are much much much lower because you're not paying for expensive fund managers to make these decisions for you. The Vanguard S&P

  • 500 index fund charges an annual fee of point zero four percent. Peanuts!

  • So index funds are a type of mutual fund.

  • All index funds are mutual funds, but not all mutual funds are

  • index funds. An index fund will clearly state that it tracks an index, and it will specify which index it tracks. For example on

  • Vanguard com, if you look up VFIAX it says here "index fund" in the title

  • So it's pretty obvious that it's an index fund. And if you look at the fund's prospectus

  • It specifically states, "The fund employees in indexing investment approach designed to track the performance of the Standard and Poor's

  • 500 index a widely recognized benchmark of US stock market performance."

  • It doesn't get any more obvious than that.

  • But for a mutual fund that is not an index fund the prospectus will state something like this:

  • "Advisor

  • Independently selects and maintains a portfolio of common stocks for the fund."

  • So that's kind of how in a nutshell you can distinguish between

  • Mutual funds that are index funds and mutual funds that are actively managed and so are not index funds. Moving right along to ETF

  • Also known as exchange-traded funds.

  • ETFs were introduced about 15 years after the first index fund, and they're very similar to index funds

  • Except for one major difference: with index funds you can only buy and sell shares once a day.

  • But with ETFs you can buy and sell your shares whenever the stock market is open

  • Even though an ETF is not really a stock you can buy and sell

  • ETFs as if they were a stock. A lot of times you'll hear the terms ETFs and index funds used interchangeably

  • But they're not the same thing. If you wanted to invest in the S&P 500 you could either go with an S&P 500

  • Index fund like the Vanguard one that I mentioned earlier, or you can go with an ETF like the SPDR S&P 500

  • ETF. The question you have to ask yourself is

  • do I need the 24/7 tradeability that in ETF offers, or am I just good with an index fund?

  • In my experience being able to trade ETFs really doesn't help you achieve long term investing success.

  • Because the fact that it trades like a stock and you can watch it go up and down on a stock chart

  • It really only encourages impulsive buying and selling and

  • Human nature has a tendency towards gambling like behavior, which is obviously the opposite of smart investing.

  • So I personally think ETFs do more harm than good and

  • You know, why even deal with the added temptation?

  • So if you're not sure whether you should go with ETFs vs index funds then I would recommend just choosing index funds.

  • They're essentially the same thing, but you won't have the added temptation to gamble with your money.

  • Most people will only have to buy once,

  • Hold and then sell when they retire so you really don't need the 24/7 tradeability of an ETF.

  • Another reason why I like index funds and this is a huge reason actually and the reason why I switched over from

  • ETF to index funds is

  • Because index funds offer automatic

  • Reinvestment. This makes it really easy for you to save and invest

  • Without even lifting a finger. Index funds allow you to set up a recurring monthly

  • Deposit from your checking account and they'll automatically buy more shares for you every month.

  • The best part is that there's no additional charge for doing this.

  • This is a free automatic reinvestment feature and it makes it a no-brainer for you to automate good investing habits.

  • ETFs do not offer this feature if you wanted to contribute more to your investments every month.

  • You'd have to buy more shares of the ETF every month, which means more work for you. Of course

  • It means you have to pay trading commission's every time, and who wants to do that?

  • So I hope you have a better understanding now of mutual funds, index funds,

  • ETFs and what similarities and differences they have. Mutual funds came first and they offered the benefit of pooled

  • Investing, then index funds came along as a special type of mutual fund with much lower fees and a type of management called

  • Passive management, and then finally the ETF came on the scene which trades like a stock and offers everything that index funds offer except automatic

  • Reinvestment. For more beginner friendly info on stock investing make sure you also check out these two videos here

  • and

  • If you're new to the channel hit that subscribe button below for new videos every week.

  • If you have any questions at all about what I talked about in this video,

  • Let me know in the comments and I'll be sure to get back to you.

  • You can also reach out to me on Instagram at @investingwithrose. So I look forward to connecting with you there.

  • Always remember to go after your dreams

  • unapologetically and to live life on your terms!

  • Cheers!

What's the difference between index funds mutual funds versus ETFs. Each of these are different but similar

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