Mutual Funds and ETFs
Mutual funds and exchange-traded funds: What’s the difference? And how do you know if your funds are socially responsible?
Plan For a Better Future
Mutual funds and exchange-traded funds: What’s the difference? And how do you know if your funds are socially responsible?
Pooled investment funds
While 21% of American families have direct ownership of individual stock, 58% have some exposure to the stock market, according to the Federal Reserve’s 2023 Survey of Consumer Finances.
Most of this additional participation in the stock market is through pooled investment funds such as mutual funds and exchange-traded funds, or ETFs, usually through a retirement plan.
A pooled fund invests money from a lot of different people into stock from an entire portfolio of companies. Both mutual funds and ETFs are pooled investments managed by a professional fund manager who determines the mix of investments, which can also include bonds and other asset types.
By diversifying holdings into dozens, if not hundreds, of stocks, bonds, and other assets, mutual funds and ETFs reduce volatility and risk. The trade-off is the individual investor does not directly control what the fund invests in, as the fund is managed by a financial professional who makes these decisions.
Mutual funds and ETFs: What’s the difference?
The main difference between mutual funds and ETFs is how they are traded.
- Mutual funds can only be purchased at the end of each trading day based on the net asset value calculated from the closing market price of all the assets in the fund.
- ETFs can be traded throughout the trading day, similarly to individual stock.
Mutual funds have a long track record – the first U.S. mutual fund from Massachusetts Investors Trust launched in 1924. ETFs are much younger. The first ETF was the SPDR S&P 500 ETF Trust in 1993.
Mutual funds tend to be actively managed by a professional who makes investment decisions – and charges a fee for the service. ETFs are often passively managed index funds with much lower fees. However, recent years have seen more passively managed mutual funds and actively managed ETFs.
According to the Investment Company Institute’s 2023 Fact Book, 125 million Americans owned 8,763 mutual funds worth a total of $22.1 trillion and 2,989 ETFs worth $6.5 trillion – accounting for 48% of the world’s regulated funds.
Evaluating mutual funds and ETFs
As with company stock, the first step to evaluating mutual funds and ETFs is to know what you own, most likely through a retirement plan, college savings plan, or brokerage account.
Make sure you know how to log into any accounts you have that invest in mutual funds or ETFs, so you can create an inventory of which funds you hold. Then you can start researching these funds to see what they are invested in, as well as researching your plans to see what other funds are available.
Read the prospectus
Every fund has a prospectus filed with the Securities and Exchange Commission that provides material information about the investment. Think of it as a “mission statement” for what the fund is investing in and why – including details about investment objectives, strategies, performance, fees, and risks.
The prospectus will include information about any socially responsible or ESG investing strategies that fund managers are using, if the fund is designed to be part of responsible investing.
The prospectus helps investors make informed decisions about whether to invest in a particular fund. It is important to read the prospectus of any fund before investing in it. If you cannot find the prospectus for a fund online, call your retirement fund manager or brokerage account manager.
Check fund ratings
Multiple organizations rate mutual funds and ETFs based on various criteria including sustainability. In the past you had to pay for most of these services, but now many of them are free.
Here are three free fund ratings tools we recommend.
As You Sow’s Invest Your Values
As You Sow’s Invest Your Values is a free online tool that analyzes the impact of thousands of US mutual funds, ETFs and 401(k) plans. You can look up almost any mutual fund or ETF by name, ticker, or fund manager to find its holdings and how it rates in seven issue areas:
Each issue area scores funds on different criteria; for example, Fossil Free Funds rates funds based on whether they hold any coal, oil, or gas, have a sustainability mandate, and invest in banks or insurance companies that fund fossil fuels. You can also find information about the fund performance.
Each issue area also lets you search for a list of top scoring funds, or a list of funds by fund manager such as Vanguard, TIAA, or Calvert. As You Sow also has retirement plan ratings for large companies.
Screenshot of top-rated mutual funds from As You Sow’s Fossil Free Funds
Natural Investments’ Heart Rating
Green America is pleased to partner with our Green Business Network member Natural Investments PBLLC, a leader in environmentally and socially responsible investing, to bring you the mutual fund Heart Rating.
The Heart Rating launched in 1992 as the first fund rating system that compares the breadth and depth of the environmental, social and governance criteria (ESG) used by fund managers to select the holdings. The rating looks at a fund’s research process, screening criteria, shareholder advocacy efforts, and cash investments in communities, particularly communities of color.
Screenshot of Natural Investments’ Heart Rating site
US SIF’s Sustainable Investment Mutual Funds and ETFs Chart
This chart displays all sustainable investment mutual funds and ETFs offered by US SIF's institutional member firms. This tool is meant for individual investors to compare cost, financial performance, screening and advocacy, and proxy voting records of competing funds. All listed funds are open to new investors. Financial performance data is provided by Bloomberg LP.
Screenshot of US SIF’s chart of sustainable mutual funds and ETFs
Want to use your dollars to invest for impact in your own community? Learn about community and impact investing.
Green America is not an investment adviser, nor do we provide financial planning, legal, or tax advice. Nothing in our communications or materials shall constitute or be construed as an offering of financial instruments or as investment advice or investment recommendations.
