Exchange-traded funds, not to be confused with EFTs, electronic funds transfer, holds a uniqueness to other types of funds. I interchanged the letters and said EFTs to our future CPA when I meant ETFs. He respectfully corrected me and has gone on to catch far more other nuances than any of our other financial professionals.
In The Market, I provided a guide with a general overview of investment vehicles including Mutual Funds, ETFs and Index Funds. However, I didn’t include the more detailed differences among them.
The “Mutual Fund” dates back to the Netherlands in 1774 when Adriaan van Ketwich created Eendragt Maakt Magt as a response to financial crisis aiming to help citizens of modest means invest.
Exchange-traded Funds, or ETFs as they are commonly referred to, launched in Canada in 1990 as the Toronto Index Participation Fund (TIP). The first to debut in the U.S. was SPDR S&P 500 (SPY) in 1993, one of the most significant years of my life.
I delved into Index Funds first because they are now more widely recognized and have grown exponentially since their slow origin in 1976 by John Bogle the founder of Vanguard.
The key difference of Exchange-Traded Funds that sets them apart from the other two is that they are traded throughout the day instead of at the end of the day. Originally, they made up less than 1% of fund trading and now comprise 26% – 30% of all U.S. trading volume.
Gemini helped me create this table summarizing the differences among the three types of funds to help me differentiate and understand them better.
This led me to another question; how do I find the type of fund that are in all my accounts comprising my investment portfolio?
The quickest way to distinguish between an Exchange-traded Fund and a Mutual Fund is by the ticker symbol.
• ETFs: typically have 3 or 4-letter ticker symbols (e.g. VOO or JPEM)
• Mutual Funds: typically have a 5-letter ticker symbol ending in “X” (e.g. AGTJX)
• Index Funds can be either and typically have a variation of index in the ticker symbol: VOO, VFIAX
Third-party research tools can also be used including where your 401(k) or IRAs are held. Morningstar is very straightforward by using the search bar to enter a fund’s ticker symbol. I had found all of our investment ticker symbols to add into our overall plan to track at Fidelity and hadn’t paid much attention to the actual symbol.
One last notable difference, you ask, why are ETFs abbreviated while Mutual Funds and Index Funds are not? ETFs are abbreviated to highlight their unique, defining feature of trading on an exchange throughout the day like a stock which distinguishes them from traditional Mutual Funds.
Index Funds are not typically called “IF” because “index fund” is a description of the investment strategy (passive tracking), not a unique trading structure. Plus, who wants to invest in “IFs”?
Mutual Funds dating back the farthest have continued to maintain the professional industry standard of using the full term as “MF” has evolved into modern-day connotations to a number of different references.
After researching and writing this, the three types of funds and ticker symbols make a lot more sense to me. Intuitively, Exchange-Traded Funds’ ticker symbols should end in X. And yet they don’t.
The Rise of Exchange-Traded Funds: A Historical Overview
Exchange-Traded Fund (ETF): What It Is and How to Invest
Featured Image – The historic Holland Amerika in Rotterdam, Netherlands transformed into the Hotel New York. Photographer Cary Wauters
Copy to share: The Nuance of ETFs – CacheCoach.com