The only real similarity between blue-chip stocks, mutual funds and exchange-traded funds (ETFs) is that they are all potentially equity investments aimed at creating a profitable return on investment. The three are essentially different vehicles for investment, even though their basic investments may overlap at times.

Blue chip or other individual stocks, mutual funds and ETFs offer ways for an investor to approach the markets and structure his or her investments.

Blue Chip Stocks

Blue-chip stocks are individual stocks of large, recognized, well-established firms that have consistently provided good, solid – although perhaps not dramatic – returns on investment for shareholders. They are not typically high-growth stocks, but they are consistent growth stocks.

Blue chips are companies that are considered very financially sound, with very large market capitalization, generally in the business of selling widely purchased goods or services. They are typically the top companies in their respective industries and/or sectors and are solidly profitable year in and year out.

Most blue-chip stocks also have a long, consistent record of paying dividends. Blue-chip stocks are commonly included in major market indexes, such as the Dow Jones Industrial Average (DJIA), the S&P 500 Index or the FTSE index. Examples of blue-chip stocks are General Electric and Coca-Cola.

Mutual Funds

Rather than being investments in a single stock such as a blue chip, mutual funds take the approach of investing in a basket of equities or other investment assets. There is a wide variety of mutual funds, sufficient to suit the investment tastes of virtually any investor. There are mutual funds known as index funds that mirror a major stock market index, such as the S&P 500. There are mutual funds devoted to different sectors such as telecommunications, metals and mining, or oil and gas, and mutual funds directed toward specific industries within sectors.

Funds are also designed according to investment goals. There are income funds that invest solely in solid stocks that pay high dividends and growth funds that focus on stocks with the highest growth potential. Some mutual funds are dedicated to one specific investment area, such as gold or silver. The basic approach of mutual funds is to create a portfolio of investments that the fund manager selects with the goal of overall maximum profitability.

Exchange-Traded Funds

Exchange-traded funds (ETFs) are traded in the same way that individual stocks are. In this way, they offer more flexibility than mutual funds. Investors in ETFs can sell short and trade on margin. ETFs contrast with mutual funds whose shares are purchased from the company operating the fund. However, much like mutual funds, ETFs offer a wide variety of investment focus.

ETFs are commonly considered a more alternative investment than mutual funds, as they typically offer more investment opportunities further removed from traditional equity investments. For example, there are a large number of ETFs focused on investment assets such as bonds and other financial instruments, commodities and foreign exchange.

  1. Why don't mutual funds trade like stocks?

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  2. In what ways are ETFs more tax efficient than mutual funds?

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