Almost half of all American households have mutual fund investments, making them one of the most common investment options.
A mutual fund is a basket of money provided by many different investors which a fund manager invests in stocks, bonds, money market instruments, and other financial assets. Investments are made based on the mutual fund’s stated investment objectives and goals. One of the key benefits of investing in a mutual fund is that the fund provides investors with a diversified portfolio of investments.
Fund managers are compensated by fees paid by investors. Annual fund operating fees are an annual percentage of the funds under management, usually ranging from 1–3% for actively managed funds. Mutual funds which track an index and are passively managed typically have lower fees. Annual operating fees are collectively known as the expense ratio. Some mutual funds also charge sales fees when a mutual fund is bought or sold.
The Pax Balanced Fund (PAXWX) launched in 1971 as the first sustainable mutual fund. The Calvert Balanced Fund (CSIFX) and Parnassus Fund (PARNX) followed in 1982 and 1984, respectively. In 1990, one of the first sustainable index funds, the Domini 400 Social Index, now the MSCI KLD 400 Social Index, was launched. A list of sustainable mutual funds can be found on the website of the Forum for Sustainable and Responsible Investment (USSIF).
Exchange traded funds (ETF)
An ETF is a newer type of pooled investment vehicle which was created in 1993. ETFs have steadily been growing in popularity over the last decade, with the amount invested growing from $1 trillion to over $5 trillion globally. Similar to a mutual fund, an ETF is a basket of money used to make a diverse set of investments. There are important differences between ETFs and mutual funds, as seen in the table below.
The first sustainable ETF, the iShares MSCI USA ESG Select ETF (SUSA), was launched in 2005. As of September 2019, there were 253 ETFs/Exchange Traded Products (ETPs), with more than $20 billion assets under management, listed globally. A list of sustainable ETFs can be found on ETF.com.
Key differences between ETFs and Mutual Funds
|Often track an index (passively managed)||May be actively managed or track an index (passively managed)|
|Can be traded throughout the day, similar to a stock||Traded at the end of the day|
|Trades occur between investors||Trades occur between an investor and a fund manager|
|Average management fee is 0.2% (if passive management)||Management fees are typically 1% – 3% (higher cost due to active management)|
|Often charged a commissioning fee for trade||Sometimes charged a sales fee for trade|
|No minimum investment amount||Minimum investment of $1,000|
Photo by Adeolu Eletu