What is the difference between mutual funds and ETFs?

Mutual funds and ETFs (Exchange-Traded Funds) have distinct characteristics that set them apart, particularly in their management styles and trading methods. The correct focus on the difference arises from the fact that mutual funds are typically actively managed. This means that a team of managers makes decisions about how to allocate the fund's assets, aiming to outperform a benchmark index through research and analysis.

In contrast, most ETFs are constructed to track a specific index and are passively managed. This passive management approach means that the ETF aims to replicate the performance of the index it follows, without the active trading strategies seen in many mutual funds. Moreover, ETFs are traded on exchanges throughout the day, similar to stocks, allowing investors to buy and sell shares at market prices.

Understanding this distinction helps investors in choosing the right type of investment based on their financial goals and preferences, particularly concerning investment strategy and management.