What investors need to know before investing*** There are fundamental differences between mutual funds and exchange-traded funds (ETFs).

They each have advantages and disadvantages.

Perhaps most importantly, if used correctly, mutual funds and ETFs can be used together to build a solid portfolio.

So what is the difference between funds and ETFs?

Similarities Between Funds and ETFs Many investors who want to know about Exchange Traded Funds (ETFs) try to find information that is different from ETFs.

But before reviewing the differences between the two, there are actually some key similarities that are valuable.

They are both diversified: both mutual funds and exchange-traded funds allow investors to purchase a basket of securities within a safe range of investments.

They typically invest in an explicit or implicit objective, such as growth, value, or income, and they typically invest in a specific category of stocks or bonds, such as large-cap stocks, foreign stocks, or medium-term bonds.

Most ETFs work like index mutual funds: Most ETFs are passively managed, which makes them most similar to index mutual funds.

In this similarity, both index funds and ETFs will mirror the performance of an underlying index, such as the S&P 500; they both have very low expense ratios compared to actively managed funds; and they can both serve as a diversifier and portfolio

A prudent investment type of construction.

Because of their similarities, investors use both funds and ETFs for similar purposes.

But before selling mutual funds and buying ETFs, it's important to understand the differences between the two.

***Differences Between Funds and ETFs*** There are several differences between funds that are important to know before choosing one for a specific investment strategy or goal.

***Funds have some advantages over ETFs, which are smarter investment vehicles for certain goals.

Some differences are noticeable, while others are subtle.

***Same funds trade on the same day, while ETFs trade on the intraday basis.

Stock orders can be placed with ETFs, but not with mutual funds.

ETFs generally have lower expense ratios than mutual funds.

***The main difference between mutual funds and ETFs is how they are traded.

What does it mean?

For example, let's say you want to buy or sell a mutual fund.

The price you buy or sell is not the true price, it is the NAV or NAV of the underlying security, and you will be trading at the NAV of the fund at the end of the trading day.

Therefore, if the stock price rises or falls during the day, you have no control over when the trade is executed.

For better or worse, mutual funds can get what they want at the end of the day.

In contrast, ETFs are day traded.

This can be an advantage if you are able to take advantage of price movements that occur during the day.

For example, if you think the market is moving higher during the day and want to take advantage of this trend, you can buy an ETF early in the trading day and capture its positive move.

On certain days, the market can rise or fall as much as 1.00% or more.

This creates risks and opportunities depending on how accurately you predict the trend.

Part of the tradable portion of an ETF is what's called the spread, which is the difference between the buying and selling prices of a security.

In short, however, the biggest risk here is that some ETFs are not widely traded, where spreads can be wider to the detriment of individual investors.

So look for broadly traded index ETFs like the SPDR S&P 500 Index (SPY) or the iShares Core S&P 500 Index (IVV), and beware of niche areas like narrowly traded industry funds and country funds.

Another difference between ETFs and their stock-trading counterparts is the ability to place stock orders, which helps overcome some of the behavioral and pricing risks of day trading.

For example, with a limit order, investors can choose the price at which the trade will be executed.

With a stop-loss order, investors can select a price below the current price and prevent losses below that selected price.

Investors don't have this kind of flexible control over mutual funds.

ETFs generally have lower expense ratios than most mutual funds and may sometimes have lower expenses than index mutual funds.

In theory, this could give investors a slight edge over the returns of index funds.

However, ETFs may have higher transaction costs.

For example, let's say you have a brokerage account with Vanguard Investments.

If you want to trade the iShares ETF, you can pay a trading fee of about $7.00, while Vanguard index funds that track the same index have no trading fees or commissions.