A mutual fund is a collection or “pool” of stocks and bonds that are sold as a single package. In other words, if a mutual fund is a hamburger, each section of the burger would represent a different stock; the bun and the patty may represent 2 types of government bonds and the lettuce, tomatoes and pickles may represent 3 different stocks. Investors are then able to purchase this “hamburger” as a single investment and benefit from what’s inside.
In this regards, mutual funds are similar to ETFs. However, they differ in term of their distribution. ETFs are sold directly through stock exchanges, while mutual funds are distributed directly by asset management companies, usually through mutual funds dealers or stock brokers, who act as fast food restaurants for those particular kind of hamburgers.
Mutual funds usually comes with higher fees than ETFs because part their fees is shared with the mutual fund dealers. So, the higher fees of mutual funds can be partly explained by the fact they come with some level of service. It’s easy to understand. A hamburger sold at McDonald’s will be cheaper than a similar hamburger ordered from a waiter in a full service restaurant. It’s important those “services” fees can sometimes be avoided by purchasing mutual funds from a online brokerages account.
The second reason why mutual funds tend to charge higher fees than ETFs is that many of them are actively managed. It means portfolio managers are trying to beat the stock market by picking above-average companies, and by trying to predict where the market is going. While it seems like a good idea in principles, historically, few portfolios managers have been able to beat the market over long period of time. Furthermore, doing those hamburgers require more hamburgers chefs in the kitchen and, as result, increase the fees associated with those burgers.« Back to Glossary Index