For many years, mutual funds were the investment vehicle of choice for the everyday investor. Individuals who didn't consider themselves savvy enough to try picking individual stocks by themselves were able to place their money in a mutual fund and have a professional money manager do the work for them at a fraction of the cost. The low-cost, low-minimum initial investment and broad diversification made mutual funds an ideal choice for many retail investors.

Exchange-traded funds (ETFs) emerged later as an alternative to the traditional mutual fund. Whereas mutual funds are traded and priced just once at the end of the business day, ETFs trade like stocks. They are priced throughout the day and provide a greater deal of intraday trading flexibility that mutual funds generally don't. Many index mutual funds now have an ETF counterpart, giving investors an additional option to fit their trading style.

The Utilities Select Sector SPDR ETF (NYSEACRA: XLU) and the Vanguard Utilities Index Fund Admiral Shares ("VUIAX") are two funds that illustrate the differences between mutual funds and ETFs that might appear nearly identical on the surface. While the underlying investments are likely very closely correlated, there are characteristics for mutual funds and ETFs that might make one preferable to the other depending on the investor's personal situation.

Portfolio Composition

Mutual funds and their corresponding ETF from the same provider generally have nearly identical portfolios. The Utilities Select Sector SPDR ETF is administered by State Street Global Advisors. Therefore, it could have a somewhat different portfolio than the Vanguard mutual fund.

Both funds are fully invested in utility stocks, but the composition of utility subsectors is slightly different. The largest difference is in the funds' gas utility holdings. As of March 7, 2016, the utilities ETF has 1.3% of assets in this area compared to the utilities mutual fund's 7.2% allocation. Allocations to other subsectors such as electric and multiple utilities are substantially similar.

The Vanguard Utilities mutual fund is more broadly invested than the Utilities SPDR ETF. The Vanguard fund has 82 holdings compared to 30 for the ETF.

Expenses

Fund expenses are an important consideration with investment funds. The expenses charged by funds come directly out of the overall assets under management and total returns. Higher expenses lead to lower returns, and investors should always seek inexpensive investment options.

Index funds generally have some of the lower expense ratios in the fund marketplace. Both of these funds carry very low expense ratios, making them very cost effective. As of March 7, 2016, the Vanguard mutual fund carries an expense ratio of 0.10%, while the SPDR ETF charges 0.14%.

Yields

Utility stocks are known for their above-average dividend yields. Utilities are mature, slow-growth businesses that generate a lot of cash flow. Since utilities generally don't have to reinvest a lot of money back into the business, they're able to distribute a lot of that cash flow to investors in the form of dividends.

Both of these funds pay above-average yields that are comparable to each other. As of March 7, 2016, the Vanguard mutual fund pays a 3.47% yield compared to the SPDR ETF's 3.41% yield.

The Bottom Line

While there are some minor differences between the two products, these two utilities index funds are very highly correlated. The decision of which product is preferable likely comes down to investor goals. The Vanguard Utilities Index Fund Admiral Shares, like other sector-specific funds from Vanguard, requires $100,000 to open an account, much higher than the average mutual fund minimum. 

Those with less than that amount to invest may prefer the ETF, which can be purchased with just a single share. ETFs carry the additional flexibility of allowing trading throughout the day for investors who wish to move in and out of positions frequently. ETFs may carry trading commissions that no-load mutual funds don't, making them potentially more costly for frequent traders. 

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