The difference between ETF and fund simply explained

Deepak Gupta January 16, 2022
Updated 2022/01/16 at 1:22 PM

The options for investing or saving our assets have never been as diverse as they are today. Whether it’s a stock app, bitcoin or trading cards: people are investing on every corner and we’re always looking for new ways to increase our money. If you’ve always wondered what the difference between ETF and others fund is, we have the explanation for you below.

ETF and fund: differences and what you should know

If you are planning to invest your money privately or have already done so, you have certainly heard of ETFs and funds. Investing in one of the two directions has become increasingly popular with private investors in recent years. Probably the crucial difference between ETF and fund is that they are both traded differently. But before we go any further in this regard, let us first explain what an ETF or fund actually is.

What is an ETF?

When one speaks of an ETF, one usually means a special type of investment fund. Its abbreviation stands for “Exchange Traded Fund”. The special designation is usually added because traditional funds are usually bought directly from the fund company or through an intermediary.

ETFs often replicate a stock index, such as the DAX or the Dow Jones. For this reason, an ETF can just as easily be called “index fund” or “passive fund”. With such ETFs, strict rules ultimately decide on the selection of the securities contained in it.

What is a fund?

A fund is an asset that is earmarked for a specific purpose. In the case of a mutual fund, that purpose is, quite obviously, to invest money. The managed assets are often invested in securities, but just as well in other investments such as real estate, vehicles or other valuables. With a fund share, you always acquire a precisely defined share of the respective assets.

So if you invest in a fund, you don’t just get a single share or property, but several shares of different investments at once. For this reason, the fund is also very popular with most investors: you lower the risk that is always associated with an investment by spreading it in a targeted manner.

ETF and index fund simply explained

While ETFs and index funds may be fundamentally similar, their biggest difference is how they’re traded. Because, as already mentioned, you trade an ETF on the stock exchange, whereas you can only purchase the classic index fund from the fund company.

This is one of the reasons why trading an ETF on the stock exchange can briefly result in minimal price deviations from the respective index. Classic index funds, on the other hand, are always traded at their so-called net asset value. This refers to the exact value of all securities contained in a fund share.

Difference between ETF and fund: summary and conclusion

As you can see, it’s not that easy to separate the different types of investments. In order to make it easier for you to remember the main difference between ETF and fund, we have summarized it for you again in a short form.

An actively traded investment fund is one of the active investments, since a fund manager tries to achieve an above-average return through active trading. A passive index fund that is traded on the stock exchange, i.e. an ETF, is referred to as a passive investment, since it only replicates the performance of a stock market index. Both types of investments have advantages and disadvantages, examples of which are their flexibility and their costs.

Now that you know the difference between an ETF and a fund, you might also be interested in how you can easily create an ETF savings plan with Trade Republic. We will also explain to you elsewhere what a broker is actually supposed to be.

Sources: Financial Flow, Financial Comparison, Moospara

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