ETFs or Funds: What Are the Differences
Costs, management style and tradability: what really sets the two instruments apart.
ETFs and traditional funds both let you invest in a diversified basket of securities with a single purchase, but they differ in practice in important ways.
Passive vs active management
Most ETFs are passively managed: they track an existing index without a manager actively picking securities. Many traditional funds, by contrast, are actively managed, with a manager trying to beat the market — generally at a higher cost.
Costs
ETFs typically have a much lower TER (often between 0.05% and 0.50%) than actively managed funds, which can have total costs above 2% a year, including management fees and, in some cases, performance fees.
Tradability
ETFs are bought and sold on an exchange during trading hours, like shares, at the real-time market price. Traditional funds are generally bought and redeemed at a single price calculated at the end of the day (NAV).
Which to choose
There's no universal answer: a passive ETF has lower costs and transparency over its holdings, but it doesn't offer the chance (nor the guarantee) of beating the market that an actively managed fund promises — often without consistently achieving it over time.