The difference between Stocks, ETFs, Index Funds, and Mutual Funds and which is best

The difference between Stocks, ETFs, Index Funds, and Mutual Funds and which is best

What is the difference between Stocks, ETFs, Index Funds, and Mutual Funds which is best for you?

This article explains the difference between each and which is best depending on your financial goals.

Before we jump into the differences, there are a few terms we wish to define first:

  • Asset Class: A grouping of investments that exhibit similar characteristics such as equities (stocks), fixed income (bonds), real estate, cryptocurrency, etc.
  • Expense Ratio: The annual fee the investor pays to own the asset class. The expense ratio covers expenses such as administrative labor, advertising, and other expenses. 
  • Intraday Trading: The ability to buy and sell equities during trading hours. Trading hours vary per country. In the US, trading hours are 9:30am to 4pm (EST). In the UK, trading hours are 8am to 4:30pm (GMT +1). In India, the trading hours are 9:15am to 3:30pm (GMT +5:30).

Here are the differences between Stocks, ETFs, Index Funds, and Mutual Funds.

Stocks

A Stock is another way to say Company. A stock is essentially a publicly traded company which is bought and sold primarily through stock exchanges. The expense ratio of a stock is 0%. You can buy and sell stocks and you will not be charged a fee for holding that stock. For example, if you bought a share of AAPL, you will not be charged a fee for holding AAPL. Keep in mind, your broker may charge a commission fee to buy and sell a stock. 

Expense Ratio: 0%

Intraday Trading: Yes

 

ETFs (Exchange Traded Funds)

An ETF is a bundle of 100 stocks and bonds or more. The expense ratio of an ETF is around .1% which is less expensive than index funds and mutual funds. This means the fund itself will charge you .1% per year for just owning the ETF. For example, if you own $10,000 shares of fictional ETF ABC, this fund will charge you $10/year to own it. Another advantage of an ETF is when you buy an ETF at any time during the day, you will receive the ETF immediately at the price shown. You don’t have to wait until the end of the day like an index fund or mutual fund. Keep in mind, your broker may charge a commission fee to buy and sell an ETF. The commission fee is a separate fee from the expense ratio.

Expense Ratio: Approximately .1%

Intraday Trading: Yes

 

Index Funds

Index Fund: An Index Fund is a bundle of 100 stocks and bonds or more. The expense ratio of an Index Fund is around .2%. This means the fund itself will charge you .2% per year for just owning the index. For example, if you own $10,000 shares of fictional index fund ABC, this fund will charge you $20/year to own it. When you buy an index fund at any time during the day, you don’t receive the index until the end of the day. This means you don’t actually receive the index at the price shown, you receive the index at the closing price. Keep in mind, your broker may charge a commission fee to buy and sell an index fund. The commission fee is a separate fee from the expense ratio.

Expense Ratio: Approximately .2%

Intraday Trading: No

 

Mutual Funds

A Mutual Fund is a bundle of 100 stocks and bonds or more. The expense ratio of a Mutual Fund is between .5% and 2.5%. These funds can be expensive because they are more actively managed than ETFs and Index Funds. If you own $10,000 shares of fictional Mutual Fund ABC at an expense ratio of 1.5%, this fund will charge you $150/year to own it. Similar to an index fund, when you buy a mutual fund at any time during the day, you don’t receive the mutual fund until the end of the day. This means you don’t actually receive the mutual fund at the price shown, you receive the mutual fund at the closing price. Keep in mind, your broker may charge a commission fee to buy and sell a mutual fund. The commission fee is a separate fee from the expense ratio.

Expense Ratio: Approximately .5 – 2.5%

Intraday Trading: No

 

Which is best? This all depends on your financial goals. 

 

ETFs, Index Funds, and Mutual Funds

If you want more diversification and are okay with average market returns, ETFs, Index Funds, and Mutual Funds are a good option. To provide you with hard numbers, this article from The Motley Fool outlines the average market returns for the S&P 500 Index over the last 50 years. 

  • From 2011 – 2020 the average returns were 13.9%. 
  • From 1991 – 2020 the average returns were 10.7%. 
  • From 1971 to 2020 the average returns were 10.9%. 

Best for: ETFs, Index Funds, and Mutual Funds are best for investors who are later in their career and want to experience less volatility in the market.

 

Stocks

If you know what you’re doing, owning individual stocks allows you to beat average market returns and build wealth much faster. On average, most investors that use Tykr can experience returns ranging between 15% and 50%.

Best for: Investing in Stocks is best for individuals who want to build wealth faster. If you want to shorten your retirement timeline and enjoy more freedom, investing in stocks is your best option.