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ETFs vs. Mutual Funds: Which Should You Choose?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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One of the most commonly touted “rules” of investing is to diversify your assets. That means buying different kinds of assets so you aren’t investing too heavily in one company or in one industry.

Rather than diversifying by manually buying stock shares in many different companies — each of which grants you an ownership interest in the company whose stock you buy — many people prefer to invest in either exchange-traded funds (ETFs) or mutual funds.

Both ETFs and mutual funds involve pooling your cash with the money of lots of other people. That pot of money is then used to buy a mix of different assets in order to minimize risk.

While there are similarities between ETFs and mutual funds, there are big differences in how these two kinds of investment products work. Learn more about investing in ETFs versus mutual funds below so you can make the most informed choice about which type of investment is best for your situation.

ETFs vs. mutual funds: the basics

Both ETFs and mutual funds give you exposure to multiple individual securities. But ETFs and mutual funds differ in how they’re sold, their typical fees and costs, their initial starting investment requirements, and often the way they’re managed.

ETFs are traded like stocks, and you can buy as little as one share of an exchange-traded fund. The price fluctuates throughout the day and is determined by what investors bid and what sellers are willing to sell for. There are many ETFs you could buy a share of for under $25.

Mutual funds, on the other hand, require investors to buy into the fund directly, which can happen only once per day, after the market closes. The minimum investment in a mutual fund is often much higher than the minimum investment for an ETF, and the price is determined by the net asset value (NAV), or how much assets in the mutual fund are worth minus liabilities.

While ETFs often cost less than mutual funds and can be easier to buy and sell, this isn’t the case for every ETF and every mutual fund, so it’s important to comparison shop carefully if you’re considering investing in either of these two types of financial products.

 ETFMutual fund

How it’s traded

  • Traded like stocks

  • You can buy or sell throughout the day on the secondary market


  • Traded once per day, after the market closes

  • Purchased directly from the fund


Typical costs

  • You may have to pay a fee (called a commission) to a broker to buy

  • Expenses associated with ETF ownership are often lower than for mutual funds


  • You may have to pay fees to buy into a mutual fund

  • Expenses associated with ownership could be higher


Minimum investment

  • The price of one share

  • Varies by fund but often $1,000 or more

What is an ETF?

An ETF, or exchange-traded fund, gets its name because it is traded on a stock exchange, such as the Nasdaq or the New York Stock Exchange. Anyone can buy an ETF, and you can buy as little as one share. You’ll need to have some money in a brokerage account to buy an ETF, but it’s easy to open an account with an affordable online broker.

You usually have to pay a commission to buy an ETF, just like you pay a commision to buy stock shares in a company, but some ETFs are commission-free. The commission you pay is a flat fee when you buy and sell, and it’s paid to your broker. For example, if you invest with Ally Invest, you pay a $4.95 commission to Ally when you buy shares of an ETF and pay the same $4.95 when you sell your shares.

If you have to pay a commission, you may want to wait until you’ve saved up a little bit of money to buy multiple shares. Buying just one share is possible, but you’d need to make a bigger profit to make up for the fee.

Many ETFs are passively managed, which means there’s no financial professional picking which assets the fund will invest in. Instead, ETFs usually track financial indexes, such as the S&P 500 or the Dow Jones Industrial Average.

You can buy ETFs to gain exposure to many different kinds of assets. ETFs could give you exposure to U.S. or foreign stocks as well as bonds, real estate and more. You could buy a few different ETFs to get a fully diversified portfolio, or you could use a robo-advisor to help you invest in an appropriate mix of ETFs.

When you buy even a single share of an ETF, you gain exposure to everything the ETF is invested in. If you buy an ETF that tracks the performance of the Dow Jones Industrial Average, for instance, you have a small interest in the 30 large publicly owned companies in the U.S. that create this average. If these companies perform well, your ETF should increase in value.

What is a mutual fund?

A mutual fund is a pool of money that is invested in a mix of different assets, just like an ETF. But unlike an ETF, you don’t buy shares of a mutual fund on a stock exchange. Instead, you have to buy shares directly from the fund or directly from a broker for the mutual fund.

You also can’t buy or sell shares of a mutual fund whenever you want; you can buy shares only at the end of each day. And unlike an ETF, the price isn’t determined by what investors will pay for it on the market. Instead, each day, the net asset value of the fund is determined by adding up the fund assets, subtracting liabilities and dividing this amount by the number of outstanding shares. When you purchase shares of the fund, the NAV is the price you pay.

In most cases, you’re required to invest a certain minimum amount to be able to buy into a mutual fund. Often, the minimum is at least $1,000. With some mutual funds, it is much higher. Selling your fund can take more time too. While “redeemable” mutual fund shares can be sold back to the fund at any time, funds usually have around seven days to send you back your money once you redeem your shares.

Mutual funds may charge a number of fees, which are often higher than the costs of ETFs. These fees can include management fees, which can sometimes become quite costly. The reason for these added costs is that most mutual funds are actively managed, which means someone selects investments that are made with the pooled money in the fund. The money isn’t just invested to mimic a financial index or by some other automated process.

ETF vs. mutual funds: who should invest in which?

If you’d prefer more flexibility and potentially lower fees, an ETF may be a better choice for you. But if you want a fund manager to make decisions about where your pooled money will go, you’ll have many more choices with mutual funds.

With either type of investment, it’s important that you research the performance of the fund carefully. You’ll want to know what it costs to buy and sell, the management fees you’ll pay, and how the investment has performed over time.

You may decide to invest in a mix of mutual funds and ETFs, or you may choose one over the other — just make sure you understand fully what you’re getting into and how your money will hopefully grow.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here

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Should You Pay Off Debt or Save Your Money?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You have a regular source of income, you’re paying your bills on time and you have some extra dollars left over each month. What should you do with that extra cash?

If you don’t have debt (lucky you!), then the choice is simple — save or invest as much as possible. If you have debt, however, the choice can be a bit murkier: Should you pay off your debt first or save? Here are some things to consider when asking yourself that question.

Three times that saving your money might be smarter

1. If you don’t have an emergency savings fund

Just when you’re cruising along, life can throw some unexpected and expensive curves your way. A sudden job loss, medical bills or car repairs can pop up out of the blue, and if you don’t have the funds to pay for them, you can end up seriously in the red. To cover unexpected costs, some may resort to high-interest credit cards and loans. Those kinds of moves can dig you into a financial hole that can take years to pay your way out of.

Saving up a healthy emergency fund can protect you in instances like these. How much should you save? Experts generally suggest that you should save an amount equal to between three and six months of living expenses. Depending on your individual circumstances, however, you may need more than that. (Check out this article to figure out how much to save and where to keep it.)

2. Your employer offers matching retirement contributions

If you’re fortunate enough to work for a company that offers a retirement plan with matching contributions, then consider making that method of saving a priority.

For example, if your employer offers to match your contributions dollar-for-dollar up to 6% of your salary in a 401(k) plan, then contribute at least that much, if possible. The money can then grow in a tax-free or tax-deferred 401(k) until you withdraw it in retirement — all that compound interest can really add up over the years. If you don’t contribute up to that amount, you’re leaving free money on the table.

Note, however, that If you need to withdraw these funds early (before the age of 59 and a half and before the account is five years old) there will be penalties to pay. That makes this a better tool for long-term savings rather than for the short-term or as an emergency savings fund.

3. Your debt has a very low interest rate

Debt gets a bad rap — often for good reason — but in some cases, carrying your low-interest debt and investing or saving your funds instead may be more beneficial. For example, the current fixed interest rate for direct subsidized and unsubsidized student loans is 5.05%, and the average 30-year fixed mortgage rate is about 4.3%. The stock market, on the other hand, has gone up an average of 10% a year since 1926.

Beyond comparing interest rates, however, you also need to assess how much risk you’re willing to take and how much access to your savings that you’ll need. Of course, there are no guarantees that your investments will perform well, and paying down debt comes with zero risk. Savings accounts are a less risky saving option, but the average interest rate is often less than 1 or 2%. Other options, such as individual retirement accounts (IRAs), have restrictions on how the funds can be used outside of retirement.

Four times debt repayment may be more beneficial

1. You have high-interest debt

It’s hard to get ahead of high-interest debt, because compound interest is working against you. Credit card interest rates, for example, average between 15 and 20% — an amount which adds up quickly. If you make the minimum payment, you may not even be making a dent in the principal amount owed, and you can spend years just paying interest. Calculators like this one can help you figure out just how much interest you’ll pay and how long it will take to pay off.

If you have high-interest debt, make sure you explore all the options for paying it down, including consolidating your debt and researching balance transfer cards.

2. Your debt doesn’t offer any benefits

Though your debt is costing you in interest, you might find that some loans may offer useful perks. For example, federal student loans may offer tax benefits and even loan forgiveness programs for eligible borrowers. Similarly, there are tax write-offs for mortgages and in many cases, the money you invest in a home will pay off down the line when you sell your property.

On the other hand, the debt on the credit card you maxed out to pay for that trip to Cabo comes with no benefits — just a bunch of interest. High-interest debt with no benefits should be at the top of your pay-off priority list.

3. You want to raise your credit score

While there are many factors that go into determining your credit score, the amount of debt you carry is an important component. If you plan to buy a home or secure a loan in the near future, take a look at your debt-to-income ratio (DTI), which many lenders consider before approving you for a loan. If your DTI is high, you may want to consider paying off some debt before applying for that new loan, which may result in lower interest rates for you later.

4. Your debt stresses you out

Debt can take an emotional and physical toll on people, ranging from depression to insomnia and more. When it feels like a black cloud hanging over your head and it’s affecting your life in negative ways, it may be in your best interest to prioritize paying debt off first.

Should you pay off debt or save?

Of course, saving vs. paying off debt early doesn’t have to be an either/or situation — ideally, you can do both at the same time. If, however, a choice must be made between the two, there are many factors to consider. As with most financial moves, there are no cut-and-dry rules, and the best one for you will depend on your individual circumstances.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Julie Ryan Evans
Julie Ryan Evans |

Julie Ryan Evans is a writer at MagnifyMoney. You can email Julie here

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Investing

How to Make Money in Stocks

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Putting money in the market is well-worn financial advice for a reason: Investing in stocks is one of the best steps you can take toward building wealth.But how, exactly, is that wealth built? How is money earned by purchasing stock market holdings, and what can you do to maximize the gains you make from your own portfolio?

How to make money in stocks: 5 best practices

The way the stock market works — and works for you — is as simple as a high school economics class. It’s all about supply and demand, and the way those factors affect value.

Investors purchase market assets like stocks (shares of companies), which increase in value when the company does well. As the company in question makes financial progress, more investors want a piece of the action, and they’re willing to pay more for an individual share.

That means that the share you paid for has now increased in price, thanks to higher demand — which in turn means you can earn something when it comes time to sell it. (Of course, it’s also possible for stocks and other market holdings to decrease in value, which is why there’s no such thing as a risk-free investment.)

Along with the profit you can make by selling stocks, you can also earn shareholder dividends, or portions of the company’s earnings. Cash dividends are usually paid on a quarterly basis, but you might also earn dividends in the form of additional shares of stock.

Micro-mechanics of how stocks earn money aside, you likely won’t see serious growth without heeding some basic market principles and best practices. Here’s how to ensure your portfolio will do as much work for you as possible.

1. Take advantage of time

Although it’s possible to make money on the stock market in the short term, the real earning potential comes from the compound interest you earn on long-term holdings. As your assets increase in value, the total amount of money in your account grows, making room for even more capital gains. That’s how stock market earnings increase over time exponentially.

But in order to best take advantage of that exponential growth, you need to start building your portfolio as early as possible. Ideally, you’ll want to start investing as soon as you’re earning an income — perhaps by taking advantage of a company-sponsored 401(k) plan.

To see exactly how much time can affect your nest egg, let’s look at an example. Say you stashed $1,000 in your retirement account at age 20, with plans to hang up your working hat at age 70. Even if you put nothing else into the account, you’d have over $18,000 to look forward to after 50 years of growth, assuming a relatively modest 6% interest rate. But if you waited until you were 60 to make that initial deposit, you’d earn less than $800 through compound interest — which is why it’s so much harder to save for retirement if you don’t start early. Plus, all that extra cash comes at no additional effort on your part. It just requires time — so go ahead and get started!

2. Continue to invest regularly

Time is an important component of your overall portfolio growth. But even decades of compounding returns can only do so much if you don’t continue to save.

Let’s go back to our retirement example above. Only this time, instead of making a $1,000 deposit and forgetting about it, let’s say you contributed $1,000 a year — which comes out to less than $20 per week.

If you started making those annual contributions at age 20, you’d have saved about $325,000 by the time you celebrated your 70th birthday. Even if you waited until 60 to start saving, you’d wind up with about $15,000 — a far cry from the measly $1,800 you’d take out if you only made the initial deposit.

Making regular contributions doesn’t have to take much effort; you can easily automate the process through your 401(k) or brokerage account, depositing a set amount each week or pay period.

3. Set it and forget it — mostly

If you’re looking to see healthy returns on your stock market investments, just remember — you’re playing the long game.

For one thing, short-term trading lacks the tax benefits you can glean from holding onto your investments for longer. If you sell a stock before owning it for a full year, you’ll pay a higher tax rate than you would on long-term capital gains — that is, stocks you’ve held for more than a year.

While there are certain situations that do call for taking a look at your holdings, for the most part, even serious market dips reverse themselves in time. In fact, these bearish blips are regular, expected events, according to Malik S. Lee, CFP® and founder of Atlanta-based Felton & Peel Wealth Management.

So-called market corrections are healthy, he said. “It shows that the market is alive and well.” And even taking major recessions into account, the market’s performance has had an overall upward trend over the past hundred years.

4. Maintain a diverse portfolio

All investing carries risk; it’s possible for some of the companies you invest in to underperform or even fold entirely. But if you diversify your portfolio, you’ll be safeguarded against losing all of your assets when investments don’t go as planned.

By ensuring you’re invested in many different types of securities, you’ll be better prepared to weather stock market corrections. It’s unlikely that all industries and companies will suffer equally or succeed at the same level, so you can hedge your bets by buying some of everything.

5. Consider hiring professional help

Although the internet makes it relatively easy to create a well-researched DIY stock portfolio, if you’re still hesitant to put your money in the market, hiring an investment advisor can help. Even though the use of a professional can’t mitigate all risk of losses, you might feel more comfortable knowing you have an expert in your corner.

How the stock market can grow your wealth

Given the right combination of time, contribution regularity and a little bit of luck, the stock market has the potential to turn even a modest savings into an appreciable nest egg.

Ready to get started investing for yourself? Check out the following MagnifyMoney articles:

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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