Differences between ETFs and Mutual Funds: Even with the same index, the 'way to buy' is different

ETFs are actually a type of mutual fund

If you’re investing in the S&P 500, which is better: a mutual fund or an ETF?

If you have this question, let’s first clarify the names. An ETF stands for ‘Exchange Traded Fund’ and is a type of mutual fund. They are not completely different assets.

In this article, we will compare non-listed mutual funds, which you apply for through securities companies, with ETFs listed on Japanese exchanges. The scope is limited to general products that aim to track stock indices, and does not include leveraged types.

For products that track the same index, there are commonalities in the price movements they aim for. However, the way you buy them and how you receive money are not the same. Rather than asking ‘which is for advanced users,’ let’s look at which one you can manage without difficulty.

Specifying a purchase price versus buying at the determined price

For non-listed mutual funds, in principle, you do not know the net asset value (NAV) that will be applied to your purchase at the time of the order. The NAV is the price calculated based on the assets of the mutual fund.

On the other hand, ETFs are traded at market prices that fluctuate during trading hours. A feature is that you can place orders using a ‘limit order,’ where you specify the price you want to buy at, or a ‘market order,’ where you do not specify a price.Comparison explanation by Japan Exchange Group

Being able to specify a price is convenient, but if there is no one willing to sell at that price, the order may not be executed. You cannot always buy at the price displayed on the screen at any time.

The ETF mechanism is useful for people who think, ‘I want to buy at this price or lower.’ On the other hand, for those who do not want to judge the price for monthly purchases, whether or not that judgment is necessary can also be a criterion for choosing.

For monthly savings, check the ‘settings available’

Let’s say you want to save 10,000 yen every month. This 10,000 yen is an example for explanation and is not a recommended amount.

What we want to compare is whether you can specify the amount, whether you can purchase automatically, what the minimum amount required is, and what happens if a purchase cannot be made. Do not decide based solely on the type of product; check the services of the financial institution you use as well.

For example, even if you can automate purchases according to your budget, if you forget to deposit money, you may not be able to buy as planned. Conversely, even if it takes a little effort, some people may find it manageable if it is only once a month.

The important thing is not ‘having many features,’ but being able to continue even in months when you are busy with work or housework. If you first write down what operations are required each month, it will be easier to compare the usability.

Thinking about what happens after receiving distributions

If you hold an ETF for a long time, you should also check how distributions are handled. ETFs themselves do not have a mechanism to automatically reinvest paid distributions into the same ETF. If you want to reinvest, you need to check the repurchase procedures or the services provided by the securities company.Toshomane-bu! distribution explanation

While it is easy to understand for people who want to receive and use cash, for those who want to continue investing to grow their assets, it may increase the management required after receipt.

When choosing a non-listed mutual fund, also check the distribution policy and how reinvestment is handled. ‘Continuing to manage without paying out distributions’ and ‘repurchasing with the distributions received’ are not the same mechanism.

Ease of purchase and safety are separate issues

There is no difference where ETFs are safe or mutual funds will not decline in value. As long as you are investing in stocks, there is a possibility of loss if the market as a whole declines.

Furthermore, with ETFs, the market price at which you trade can deviate from the net asset value calculated from the underlying assets. Even if they aim for the same index, the conditions at the moment of purchase are not necessarily the same. Risk explanation by Japan Exchange Group

Regarding costs, you should not assume that ‘because it is an ETF, it is definitely cheaper,’ but rather check the holding costs and trading conditions for each candidate.

When considering where to invest for your NISA, you do not need to choose based solely on the impression of the product name. Can you afford it with your budget? How much effort does it take to continue? What will you do with the money you receive? Organizing your thoughts in this order makes comparison much more accessible.

Key Points

・ETFs are also a type of mutual fund. One of the main differences is that they are traded on an exchange.
・For monthly accumulation and reinvestment of dividends, check the product structure and the services provided by the platform.
・Choose based not only on ease of purchase, but also including the risk of price decline and costs.

※This article provides general information and is not individual investment advice.

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