Investing 101

Pooled investment funds aggregate many individual investments into one large investment, allowing investors to benefit from economies of scale. This allows individual investors to gain wide exposure by bundling securities together and managers benefit from decreased transaction costs through large transactions with pooled capital. Mutual funds, hedge funds, ETFs and pension funds are all examples of pooled investments. 

The pooled fund is professionally managed by experienced financial professionals who try to deliver the highest potential return for their investors. The most common pooled investment fund is a mutual fund, which is actively managed and contains a large number of securities.

Unlike mutual funds, ETFs can be traded on the stock market like shares but mutual funds can only be purchased after the market shuts, based on the calculated price. As a result,, EtFs are viewed as more liquid than mutual funds. ETFs are also passively managed, meaning that their performance is pegged to a specific market index. Some people prefer mutual funds because they are actively managed and investors can rely on the professional manager to build a sound portfolio, rather than following a market index. 

Mutual funds are known for having higher fees and expenses than ETFs because of the higher costs associated with managing an active fund such as manpower and trading fees. ETFs on the other hand are passive investments which require less rebalancing and less labor hours. 

ETFs offer tax advantages to investors too since passively managed portfolios realize fewer capital gains than actively managed mutual funds. 

So what's the difference between ETFs and pooled investments? 

ETFs vs Pooled Investments

Exchange Traded Funds (ETFs)

After the “ETF Rule” passed in September 2019 by the SEC, ETF issuers have been able to bring new strategies to the market much easier than before. This has caused the ETF market to increase by 50%, equivalent to a $3.9 trillion ETF industry. This market has seen an increase in popularity because of its simplicity, cost efficiency and diversification. Especially after the pandemic, investors are looking for safer investments to diversify their portfolios with and further growth may be ahead. 

Dave Nadig, CIO at ETF trends believes that ETFs are likely to surpass mutual fund assets in the US over the next five years. He believes that with the integration of technology into the asset management space, investors will lean more towards ETFs because of their efficient nature. 

The standout feature of an ETF is that it can be traded on public exchanges like a stock. This allows easy and cheap investment for all types of investors. Additionally, this kind of investment provides risk diversification. 

The rise in popularity of ETFs has led to some of the largest financial institutions offering their own products: iShares, Vanguard, Charles Schwab, Proshares. 

As an investor, you can choose what type of ETF you want to invest in as there are thousands to pick from. If you are looking for a longer-term investment, you may choose an ETF that tracks mega-cap stocks but if you’re investing on the short term, you may be interested in an ETF that tracks startups with a high growth potential. 

How have ETFs become so popular?

ETFs vs Pooled Investments