- An ETF trades on a stock exchange, much like a traditional stock. Unlike a stock, which is representative of a share in a single company, an ETF represents a fractional ownership in a pool of assets, such as stocks, bonds, etc. The largest and most common ETFs seek to mirror the performance of major stock indexes by owning shares of stock in the same weight as they are given by the relevant index. For example, an ETF that seeks to mirror the London Stock Exchange (FTSE) will own shares in the same proportion as the weight that the stocks are given on the FTSE index. This is an easy way to get broad exposure to international markets rather than specific stocks. ETFs are bought like stocks, so there is a commission each time an additional deposit is made. Therefore, they are better suited to single lump-sum deposits.
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A mutual fund is an investing instrument that buys a pool of various stocks, bonds, etc. Traditionally, mutual funds are managed actively by investing experts to maximize return. Many mutual funds specialize in certain types of investment. For example, there are various mutual funds that specialize in international stocks or international bonds. Moreover, there are mutual funds that focus on specific regions or countries.
Mutual funds are very useful for investors who plan to make a series of investments rather than a single lump-sum investment because there is not a commission charged on the deposits. - If you decide to buy international stocks, it is important to note that unlike American stocks that usually pay a steady quarterly dividend, foreign stocks are more apt to pay single lump-sum dividends and/or to pay with a different frequency. For example, many pay annually.
