A Mutual Fund is a company. That’s the best way to think about it. That company owns securities, such as stocks, bonds, etc. You buy into shares of that company when you purchase shares of the mutual fund. If you want to buy or sell shares, that is done at the close of the investment day. There are management fees to the management of the “company” and tax considerations.
Exchange Traded Funds (ETF) are a basket of securities meant to mimic the returns of a specific index. For example, maybe in your strategy, you want to own some of the S&P 500. Rather than go and figure out a way to buy all 500 stocks in that index, you could purchase an S&P 500 ETF. That ETF will attempt to mimic the price movement of the S&P 500, but you won’t own 500 stocks. ETFs are traded like stocks throughout the day. The expenses tend to be lower than mutual funds, but the fund is often not actively managed. However, it can be, but that does typically add to the fee.
Finally, a Hedge Fund is one you often hear about in the news that the ultra-wealthy invest in. Hedge Funds are always actively managed. The idea behind them is that they are trying to hedge against risk while capturing maximum upside. They often invest in things outside of stocks and bonds. Hedge Funds tend to come with a huge cost, which is why not everyone invests in them.
There is a lot more to each of these definitions, but hopefully, this helps answer some questions you had. If you are uncertain on any of these terms or have other investment questions –please contact us to schedule a meeting. (503)257-0057 | firstname.lastname@example.org
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