Mutual Funds vs. ETFs: Which is Better for the Same Index?

What are mutual funds?

These are products purchased through a distributor.

A key feature is that it is easy to set up a savings plan starting from a small amount. Once set up, you can take advantage of a system where purchases continue automatically.

What are ETFs?

These are investment trusts listed on a stock exchange.

Like stocks, they can be bought and sold at market prices during exchange trading hours.

What is the difference?

Mutual funds are a method that makes it easy to set up a savings plan starting from a small amount. Once set up, they offer the convenience of continuing automatically.

ETFs can be bought and sold at market prices during trading hours. You can also place orders at your own timing while watching the price.

While the net asset value of a mutual fund is generally calculated once a day, ETFs are traded at market prices during trading hours, and the price fluctuates in real time. This is a major institutional difference between the two.

Note that it is not necessarily the case that ‘mutual funds are always automatic savings’ and ‘ETFs are always ordered by yourself.’ Depending on the brokerage firm, some may support savings plans for ETFs as well.

Three things to check even for the same index

You might think that ‘if the products are linked to the same index, the contents are the same whether it is a mutual fund or an ETF,’ but in reality, there are a few points you should check.

・Costs

Even for products linked to the same index, costs such as trust fees vary from product to product.

・Presence or absence of currency hedging

For products that track overseas indices, the presence or absence of currency hedging may vary depending on the product.

・Handling of distributions

How distributions are handled also varies by product. Some have a mechanism for automatic reinvestment, while others are designed to pay out distributions. This is not a matter of which is better or worse, but a point you should check as part of each product’s structure.

I believe it is important to adopt a mindset of checking these points individually rather than assuming that “the same index means the same product.”

A fork in the road for your approach

“Do you want to manage your investments simply, focusing on automated savings plans?”

“Do you want to place orders yourself while watching market prices?”

I think this difference can also be a factor in deciding whether to choose an investment trust or an ETF.

For those who think, “I want to save automatically every month and continue without worrying too much about price fluctuations,” an investment trust might be a good fit. For those who think, “I want to trade myself while watching market prices,” an ETF is also an option.

Things to check before deciding

・Even with the same index, costs and structures differ by product

As mentioned above, there are points you should check, such as costs, currency hedging, and the handling of distributions.

・ETFs may incur transaction fees each time you trade

While many investment trusts have no purchase fees (no-load), some brokerage firms charge fees for ETFs each time you trade, just as they do for stocks. The presence and amount of fees vary depending on the product, the brokerage firm, and the trading method.

・There are ETFs eligible for NISA, but available products vary by financial institution

You might think, “Aren’t ETFs unusable in NISA?” but there are ETFs that are eligible for the NISA installment investment quota. However, since the specific ETFs handled vary by financial institution, it is safer to check in advance.

Summary

• Investment trusts are products that make it easy to set up automated savings plans starting with small amounts

• ETFs are products that can be traded at market prices during trading hours

• The net asset value of an investment trust fluctuates once a day, while the market price of an ETF fluctuates in real time

• Even for the same index, costs, currency hedging, and the handling of distributions differ by product

• Whether you want to focus on automated savings plans or place orders yourself by watching market prices is one factor in your decision

• There are ETFs eligible for NISA, but availability depends on the financial institution

Which one you prioritize depends on the individual. I hope you choose based on how you intend to use them.

*Investments fluctuate in price and do not guarantee principal. Past performance does not guarantee future results. This does not recommend any specific product or financial institution. Please make your final investment decisions yourself.

Thank you for your hard work today.

I will be back with more next week.

Yuyushi