Common Terms:
Actively Managed Mutual Fund- Fund that will trade stocks based on a strategy outlined in their prospectus. Some prospectuses can be very restrictive and defined, while others can be very broad and flexible. Performance will be based on decision making of manager or group of managers. Costs are typically higher for these funds compared to index funds, since they have the additional costs of investment research, analysts, trading, and fund managers.
Index Fund- A mutual fund that is managed to match a specific index. For example, an S & P 500 Index fund would buy the 500 companies owned in the index. Index funds offer portfolio diversification, lower costs compared to actively managed mutual funds, a consistent and clear investment strategy, and the potential for high tax efficiency.
Enhanced Index Fund- These differ from Index Funds in that they have an additional screening process to determine which stocks will be held in the portfolio. Each company will have their own methods for screening stocks, and may overweight, or underweight certain companies or industries based on their own analysis. Annual expenses are still lower compared to actively managed funds, but may be slightly higher than an index fund.
Exchange Traded Funds- These “funds” represent baskets of securities and trade on exchanges like stocks. They can be purchased and sold throughout the trading day, instead of just at end-of-day prices like most mutual funds. They offer similar benefits of index funds with low costs, defined consistent strategies and potential for high tax efficiency.