Index Funds Vs Mutual Funds Vs Etf (Which One Is The Best?!)

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 fund