If you're researching investment options for your brokerage or retirement account, you might consider exchange-traded funds (ETFs) and mutual funds. Both types of funds offer investors the opportunity to diversify their portfolios and potentially earn returns that track the performance of a particular market or index. However, there is a key difference between these two types of funds: actively managed vs. passively managed.
Actively managed mutual funds are run by professional fund managers who try to outperform the market by selecting individual securities that they believe will perform well. These managers use their expertise and research to make investment decisions, and they may buy and sell securities frequently in an effort to maximize returns.
Passively managed mutual funds, on the other hand, simply track the performance of a particular market or index, such as the S&P 500. These funds are not actively managed by a professional fund manager, and the securities within the fund are simply held to match the performance of the market or index being tracked.
First things first: Personal finance experts recommend buying the funds directly from the mutual fund company rather than through a broker, as this can help investors minimize fees and potentially earn higher returns over time.
When it comes to choosing between actively managed and passively managed mutual funds, there is no one-size-fits-all answer. Each type of fund has its own advantages and disadvantages, and the best choice depends on an investor's individual goals, risk tolerance, and investment style.
For example, investors who are looking to take a more hands-on approach to investing and who have a higher risk tolerance may prefer actively managed funds, as these funds offer the potential for higher returns but also come with higher fees and a greater risk of underperformance. On the other hand, investors who are looking for a more passive approach to investing or who are risk-averse may prefer passively managed funds, as these funds offer lower fees and a more predictable return.
Looking for the top mutual funds? These are the best U.S. equity stock funds based on their five-year performance:
- Vanguard 500 Index Fund (VFIAX)
- Fidelity 500 Index Fund (FXAIX)
- T. Rowe Price Equity Index 500 Fund (PREIX)
- Schwab S&P 500 Index Fund (SWPPX)
- iShares Core S&P 500 ETF (IVV)
It's worth noting that small fees can consume a large portion of your returns over time, so it's important to pay attention to fees when selecting a mutual fund. Investing in a mutual fund with low fees can help investors maximize their returns over time.
T. Rowe Price mutual funds are a common sight in 401(k) plans, and the company offers a range of funds to suit different types of investors. Some of the top-rated T. Rowe Price mutual funds include:
- T. Rowe Price Equity Income Fund (PRFDX)
- T. Rowe Price Blue Chip Growth Fund (TRBCX)
- T. Rowe Price Capital Appreciation Fund (PRWCX)
- T. Rowe Price New Horizons Fund (PRNHX)
Structurally, mutual funds and ETFs are similar. Both hold assets in the form of securities (i.e., stocks or bonds) and both sell shares of the fund to investors. However, ETFs are traded on an exchange like stocks, meaning that investors can buy and sell shares throughout the trading day, while mutual funds are priced and traded only once per day, at the end of the trading day.
It's awfully hard to beat the stock market consistently. In 2022, despite many advantages, most mutual funds couldn't do it. According to a report by S&P Dow Jones Indices, 70% of large-cap fund managers in the U.S. underperformed the S&P 500 in 2022, highlighting the difficulty of consistently outperforming the market.
Mutual funds and exchange-traded funds (ETFs) are two investment vehicles used by investors to pursue diversification. Though the two funds have some similarities, they also have some key differences that make them better suited for different types of investors. When considering mutual funds vs. ETFs, it's important to consider the fees, investment style, and goals of each fund before making a decision.