Index Funds vs Mutual Funds vs ETFs | What's The Difference?

What's up guys? In this video, we're gonna talk about index funds versus mutual funds versus ETFs, also known as exchange traded funds. Now, we're also gonna talk about how those relate to private funds, you know, including real estate hedge funds, private equity, and venture capital, but we're mainly gonna focus on these. So the key distinction is that mutual funds, index funds, and ETFs, they are all public Okay. Meaning that you can go, anybody can go out and buy them. You know, you can access them. Um, we'll talk about maybe a few of the, you know, asterisks on anybody. Um, but, uh, yeah, for the most part they are public investment vehicles. Now, real estate funds, hedge funds, private equity, and VC, these are all private investment vehicles. And we'll talk a little bit more about what exactly that means. So let's break them down one by one a little bit. Okay. So mutual funds were kind of the first ones to start. The first mutual fund was actually launched in 1924. Okay. And basically what it was is it said, hey, I'm a good investment manager. I know how to pick stocks. I'm going to go and I'm going to pick all of these stocks that I think should be in a portfolio, whether that's a growth or a value or what, you know, whatever my investing strategy is. And I'm going to manage that portfolio, but you know, Anybody can invest into it, but I just, at the same time, I don't really want everyone putting in like $1 or $10. So usually mutual funds have minimum investments. So let's call it like $3,000 minimum investment, okay? I think that's probably about pretty standard. Just so that, you know, I can collect enough money that it makes sense to take on your capital. A key distinction from mutual funds and other types of funds is they are actively managed. Okay, meaning like I'm on the day-to-day, I'm running it, I'm constantly rebalancing, reallocating, repicking, things of that nature. And because I'm spending so much time, right, running a mutual fund, I'm going to charge you a fee. And I'm going to take probably 1 to 2% of assets under management, give or take. Now, the reason why I personally don't think mutual funds are great is because of the fee right there. That 1 to 2% kills you, you know, when you take into account of compound interest over 10, 20, 30, 50 years. No bueno. But those— I mean, mutual funds are great if you just really don't want to think about it and, uh, you want to trust somebody else. Let's talk about index funds. I mentioned that, you know, mutual funds follow a benchmark. Usually index funds are that benchmark. So, you know, the S&P 500 or the Russell 2000, it's basically An index fund is a pooled investment vehicle that takes all those assets and except the thing about them is there's no minimum. You can invest a dollar. So anybody can invest those. Is you can only buy and sell them once a day. Okay? So, and that depends on the broker, but usually with indices, it's because they take, you know, they rebalance that index at the end of each day. It's like an open and a close. So you can't really time the price on indexes as much, but they're great because there's no— you can buy like a fractional share of indices usually. And then again, on index funds, very low fees. Okay, very low because I mean, it doesn't take a lot to manage them, right? So those are index funds for you. Now, ETFs, also known as exchange traded funds. I guess it's the other way around. They're called exchange traded funds, but everybody calls them ETFs. ETFs. They're very similar to index funds. Usually ETFs can get a bit more specific. Like you'll see ETFs focused on like a sector, right? The healthcare or, you know, technology or growth stocks or, you know, things like that. So they get a little more specific or, you know, dividend appreciation or international or emerging markets, right? Whatever they are. They're basically the same as ETFs. There's no minimum. However, a lot of brokers require that you purchase the entirety of the ETF. So, you know, one of my favorites, not financial advice, you know, like the VOO index, Vanguard's, you know, it tracks the S&P 500 index. Um, and that right now, you know, this is, you know, July, uh, 2021 is priced at like $400. So if I wanted to buy that ETF, I, you know, I'd have to, if only I had $200, um, depending on the brokerage that you go through, like if you go, I think Schwab and You know, other ones allow you to buy fractional. I don't think Vanguard does though. So that's something to be aware of. So it's kind of a min, not really, because they're not super high. It just depends on the cost of that index. But I'm going to say just a min on the price, you know, just depending. Now, the thing about ETFs is you can buy them, you can buy and sell them whenever you like, all in the same day, right? So if you're kind of maybe tracking the price a little more, And you know you're actively trading in and out of these you know positions, then an ETF might be the better way to go. And honestly, the fees are almost identical to index fund. Now these are all regulated. I'd say you know fairly similarly compared to private funds. You know the the reason these are private funds is you have to issue what's called a private placement. Okay, they're regulated entirely differently. So, and obviously there's differences between, obviously, 'cause this mutual fund's an active manager and you have, you know, an investment company, there's a whole bunch to understand there. We won't get into that in this video. But just remember, you know, back to what we said, mutual funds, index funds, ETFs, all public. Real estate, hedge funds, private equity, venture capital, all private funds. All right? So let's talk a little bit about these private funds. Are so active, passive, passive, active. Okay. Um, they are actively managed. Um, for the most part, fund managers are very active and they are going to charge high fees. Okay. They're usually going to charge, um, a, you know, management fee and then a portion of the profits. Private investments are a great diversifying element to your portfolio. You can't even invest in these funds unless you're an accredited investor or higher. Now, there's a few exemptions and we won't get into that too far, but like, if you— if they elect to take the 506 exemption, then they can take up to 35 non-accredited investors. So basically like anybody, any one of these guys, right, that can invest in those. Usually they don't want to, right? Private funds, like to take on a non-accredited investor, it's a lot of work, right? They don't want to do that. They would much rather take a larger check for, you know, $500,000 or $1 million or a couple million. Makes way more sense, you know, on the back end. So usually people that only get in, you know, from a non-accredited lens are, you know, friends and family. Now, with that said, there are like different platforms that allow you to invest in alternative assets because these are all called alternatives, right? For example, in real estate, you've got Fundrise, you know, and they kind of do— I think they do a Reg A offering. So that's kind of an exemption, not really a private placement. With venture capital, like a similar investment would be like a Kickstarter, vehicles like that. And there are other ways that, you know, non-accredited investors can get into these alternative assets, but usually it's just not in their best interest, right? They just don't have that much money and they're not looking for that extra diversification. And most of the time these alternative assets carry an additional risk on them. Now, with probably the exception of real estate, you know, that's kind of more of a stable cash-flowing investment, but these other ones, They're usually shooting for the moon. They're shooting to beat these, usually by taking on additional leverage, additional debt, you know, things of that nature to beat the market. But I digress a little bit. So in terms of the minimum investment, that's what I'm talking about. You know, like if it's an actual fund, a private placement fund, they're gonna have, I mean, probably the lowest I've ever seen is $50K. You know, they're usually gonna be $100K, $500,000, $1 million, right? Unless, of course, they, you know, they take on those non-accredited investors. So, you know, different— they're just very different investments. So again, not financial advice, but me personally, I love ETFs and I think they're great and I love alternative investments. Now you're probably asking me like, Lincoln, why would I ever want to invest in these? You know, if they have high fees, you just told me that you don't like mutual funds. Because they nerf your returns. Again, it comes back to the you know the diversifying element of these, and you know you're you're kind of chasing a higher return on these investments. So it's really kind of a radically different investment, and a lot of our other videos you know jump into that more. But I hope you have a good understanding of you know mutual funds, index funds, and ETFs, and kind of how they compare and contrast to alternative. Investments. Hope you guys have a good one.