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ETFs vs Mutual Funds Cheat Sheet
A printable reference covering ETFs, mutual funds, expense ratios, trading prices, taxes, and diversification for grades 9-12.
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ETFs and mutual funds are pooled investments that let investors buy many stocks, bonds, or other assets through one fund. This cheat sheet helps students compare how these funds trade, how they charge fees, and how they may affect taxes. Understanding the differences can help students make smarter long-term investing decisions and avoid judging funds by price alone. The most important ideas are net asset value, market price, expense ratio, diversification, and tax efficiency. Mutual funds usually trade once per day at net asset value, while ETFs trade throughout the day like stocks. Costs include expense ratios, possible trading fees, and sometimes tax costs from capital gains distributions.
Key Facts
- An ETF is a pooled investment that trades on an exchange throughout the day at a market price.
- A mutual fund is a pooled investment that is usually bought or sold once per trading day at its net asset value.
- Net asset value is calculated as NAV = (total fund assets - total fund liabilities) / number of fund shares.
- Annual fund cost can be estimated as cost = amount invested x expense ratio.
- A 0.20% expense ratio means the yearly cost is about 1,000 invested.
- ETFs are often more tax efficient because investors usually buy and sell shares with other investors on an exchange.
- Mutual funds can create taxable capital gains distributions when the fund sells investments for a profit.
- Diversification reduces risk by spreading money across many investments, but it does not eliminate the risk of losing money.
Vocabulary
- ETF
- An exchange-traded fund is a pooled investment fund that trades on a stock exchange like an individual stock.
- Mutual Fund
- A mutual fund is a pooled investment fund that collects money from investors and buys a portfolio of assets.
- Expense Ratio
- The expense ratio is the yearly fee charged by a fund, shown as a percentage of the money invested.
- Net Asset Value
- Net asset value is the per-share value of a fund based on its assets minus liabilities.
- Capital Gains Distribution
- A capital gains distribution is a payment to fund shareholders from profits the fund made by selling investments.
- Diversification
- Diversification means spreading money across different investments to reduce the impact of one investment performing poorly.
Common Mistakes to Avoid
- Thinking a lower share price means a fund is cheaper, which is wrong because fund value depends on what the fund owns and how many shares exist.
- Ignoring the expense ratio, which is wrong because even small yearly fees can reduce returns over long periods.
- Assuming ETFs and mutual funds trade the same way, which is wrong because ETFs trade during the day while most mutual funds trade once after the market closes.
- Forgetting taxes, which is wrong because capital gains distributions or profitable sales can create tax bills even if the investor reinvests the money.
- Believing diversification removes all risk, which is wrong because a diversified fund can still lose value when markets decline.
Practice Questions
- 1 An investor puts $2,000 into a fund with a 0.25% expense ratio. Estimate the yearly fund cost.
- 2 A fund has total assets of 500,000, and 1,000,000 shares. What is its NAV per share?
- 3 An ETF is bought at 92 per share. What is the gain per share before taxes and fees?
- 4 Explain why an investor who wants to trade during the day might prefer an ETF, while an investor who wants automatic investing might prefer a mutual fund.