I thought of a good analogy to explain mutual funds vs ETFs, tell me what you think:

Mutual funds are like a bowl of soup and ETFs are like cans of soup. They both contain the same ingredients (the same component stocks), but how much you can invest into them differs. You can only buy ETFs in shares (you have to buy the soup in whole cans), but with mutual funds you can dole out as much or as little into your bowl as you like.

An example is Vanguard’s Total Stock Market Index Fund, which contains all (most?) publicly traded US companies, around 4,000 of them. So by buying this index fund, you own a piece of all companies in America that have stocks. By doing this, you place your faith in the American economy as a whole instead of a single company.

The mutual fund version of this index fund has the ticker symbol VTSAX. There is a minimum investment of $3,000 to start, but future investments can be as little as a dollar. Scoop as much into your bowl at a time as you’d like.

The ETF version of this fund is VTI. The minimum investment is the price of one share of this ETF. As of Friday, the price per share of VTI is about $260, meaning if you had $1,000 to invest, you’d be able to purchase 3 shares, with $220 left over. If you added another $40, you’d be able to buy a 4th share.

Mutual funds tend to be proprietary, so if you tried to buy VTSAX on Fidelity, they’d charge you $75 per trade. However, ETFs trade like stocks, so they can be bought on any brokerage for no fee (thank you Robinhood for forcing all companies to go to a $0 commission trading model).

Some people I’ve coached and helped to set up investment accounts hold VTI in their Fidelity Roth IRAs