Mutual funds and exchange-traded funds are both pooled investment solutions that can successfully offer an advisor's strategies to a larger group of investors. The two types of funds share many similarities, but are also different in numerous ways. Advisors need to understand the nuances of both to choose the right investment vehicle to meet their goals.
Mutual funds and some ETFs are registered entities under the SEC's Investment Company Act of 1940. An ETF needs an exemptive order from the SEC in order to operate, which influences its start-up costs significantly. A mutual fund's creation costs are less than an ETFs but can vary from fund to fund depending on whether they are created within a shared or series trust, or as a stand-alone fund. While a mutual fund can purchase or hold only the securities that qualify under the strategy listed in its prospectus, an ETF tracks an index, sector, commodity or currency that is outlined in its prospectus and is also allowed to hold securities outside of the tracked entity.