Mutual funds and exchange-traded funds are common investment products for retail and institutional investors.
The first mutual fund, the Massachusetts Investors Trust, was created in 1924. From 1924 until the mid-1970s mutual funds were a niche product. It was not until The Vanguard Group established the first retail index fund in 1974 that assets invested in mutual funds began to grow and became mainstream. As of the end of 2019, worldwide mutual fund assets totaled $55 trillion.
Mutual funds can generally be classified into two types: passive index funds and actively managed funds. Passive index funds track a specific index such as the S&P 500 or the Russell 2000. Actively managed funds are usually classified by the type of investment strategy of the manager. Examples include domestic large-cap growth, investment grade bonds or international value. The manager of the fund will buy and sell stocks or bonds that the manager believes will produce positive returns and that are suitable based on the mandate of the fund.
An exchange-traded fund (ETF) is an investment vehicle that trades on a stock exchange and can be bought and sold during market hours. The first successful large-scale ETF launched in 1993, the SPDRs (or Spiders), which tracked the S&P 500 (Ticker: SPY). Additional ETFs that tracked the Dow, the Diamonds (Ticker: DIA), the NASDAQ 100, the ‘cubes’ (Ticker: QQQ), followed.
Most ETFs are passive and track a specific index or sector. There are domestic equity, international equity, bond, commodity and currency ETFs. The growth of the ETF market has been 25% annually over the past decade. Over $5 trillion was invested in ETFs at the end of 2019.
The matrix below summarizes some of the similarities and differences between mutual funds and ETFs.
| ETFs | Mutual Funds | |
| Passive Index Options |  | |
| Fixed Income Index Options | | |
| Actively Managed Options | | |
| Sector-Specific Index Options | | |
| International and Country-Specific Index Options | | |
| Low Expense Ratios for Passive Index Options | ||
| Lower Fees | | |
| Superior Tax Efficiency | | |
| Transparency of Holdings | | |
| Throughout the Day Trading | | |
| Throughout the Day Pricing | |