Investment Basics - ETFs

Many relief associations consider investing in exchange traded funds as an alternative or in addition to mutual funds. This edition of Investment Basics provides a brief comparison of these two investment options. Relief association trustees should consult an investment professional for specific assistance regarding the relief association’s options and investment portfolio.


Mutual Funds are created when investors give money to a fund management team for investment. This team invests the pool of money in assets, such as stocks or bonds. Investors purchase shares of mutual funds through a broker or directly from a mutual fund firm. Mutual funds are only bought and sold at the end of each day. Prices are determined by the daily ending value of all assets that make up the particular mutual fund.

Exchange Traded Funds (ETFs) are created when an investment firm forms a fund from a bundle of assets, such as stocks or bonds. The fund that is created usually tracks an index, like the S&P 500 Index, for example. Once the assets are formed together, creation units are made. Creation units are large blocks of shares that are split up and traded on the open market. ETFs are traded on exchanges in the same way that individual stocks are traded. ETFs can be bought and sold at any time during the day. The price is determined by the price of the assets making up the ETF at the time of the transaction. 

Costs and Fees

Mutual fund investors may be charged fees depending on whether the shares were purchased directly from the fund or through a broker. Generally, shares that are purchased from a fund can be no-load, front-end load, or back-end load funds. No-load funds do not charge a fee for an investor to buy shares of that particular mutual fund. Front-end load funds charge a fee that is generally between one and five percent of the initial investment amount. Back-end load funds charge a fee when the investment is sold that also is generally between one and five percent. Additional fees may be charged when mutual funds are purchased from a broker.

By contrast, ETFs do not charge front-end or back-end load fees. However, ETFs are traded on open markets and are subject to brokerage commissions for each transaction made. ETFs also generally have lower expense ratios than mutual funds. Expense ratios reflect the operating expenses, advisory fees, and administrative costs that are charged to investors.  


When investors earn dividends from mutual funds, the dividends can be automatically reinvested to buy more shares of the mutual fund. These reinvestments are done at no extra charge to the investor.

Dividends earned on ETFs are placed into the investor’s brokerage account. If the investor wishes to reinvest these dividends, a brokerage fee is usually charged. 

Investment Authority

Relief associations that are authorized to invest under the expanded list of authorized investment securities have authority to invest in ETFs as long as the underlying assets of the ETF are directly-authorized investments under the expanded list (except for “other investments” (k)). (See Minn. Stat. § 356A.06, subd. 7(j).) This means that relief associations do not have authority to invest in ETFs that, in turn, invest in “other investments.” Securities that are classified as “other investments” include international bonds, emerging market equity, and resource investments. 

Additional Resources

Additional information is provided for in a Statement of Position on Relief Association Investment Authority and in another Statement of Position on Relief Association Investment Policies.

Published last in the March 2010 Pension Newsletter