Kevin Dick
Posted on Feb. 24, 2026
A common topic that arises when we meet with clients is they want to know what their money is actually being invested in. You’ve worked hard to earn and save, so you deserve a clear answer to that question. In this article, we’ll break down two of the most common building blocks of a typical investment portfolio: mutual funds and exchange traded funds (ETFs). This way, you can feel confident that you understand exactly where your money is and why it’s there.
Key Definitions:
Security
A security is a broad term for any financial asset you can invest in.
Think of it as an umbrella category that includes things like stocks, bonds, and pooled investments (such as mutual funds and ETFs). When someone says, “we’re investing in securities,” they simply mean investable financial instruments.
Stock (Equity)
A stock represents partial ownership in a company.
When you buy stock, you own a small piece of that business. If the company grows and becomes more valuable, your shares may increase in value. Some companies also share profits with shareholders through dividends.
Stocks generally offer higher long-term growth potential, but they also come with more short-term ups and downs.
Bond (Fixed Income)
A bond is essentially a loan you make to a company or government.
When you buy a bond:
- You are lending money
- They agree to pay you interest
- They repay your original amount at a set future date
Bonds are typically more stable than stocks and are often used to provide income and reduce overall portfolio volatility. Bonds can also be bought and sold on the secondary market.
Active vs. Passive Management
Active management involves a professional investor or fund manager trying to outperform the market by:
- Selecting specific stocks or bonds
- Timing purchases and sales
- Adjusting strategy based on economic conditions
The goal is to “beat the market,” but this usually comes with higher costs.
Passive management, on the other hand, aims to match the performance of a market index (like the S&P 500) rather than outperform it.
This is typically done through index funds or ETFs that:
- Track a specific market
- Keep costs low
- Trade less frequently
The goal is steady, low-cost market exposure rather than market-beating returns.
Pooled Investments
A pooled investment or pooled fund is a financial structure where money from multiple investors is combined and invested together in a diversified portfolio of securities.
When an investor purchases shares of a pooled investment, they are not directly buying the individual assets held in the portfolio. Instead, they are purchasing an ownership interest in the fund itself. The fund is the entity that owns the underlying securities, which may include a wide range of stocks, bonds, or other investments. One of the primary advantages of pooled investments is low-cost diversification, meaning small investors can gain exposure to a broad mix of assets and opportunities that might otherwise be only available to large investors.
There are many different types of pooled investments, however two of the most widely utilized are mutual funds and exchange traded funds (ETFs).
Mutual Funds
A mutual fund is a pooled investment product. When an investor buys a share of a mutual fund, the fund’s portfolio manager then uses the money to invest in assets that fit the mutual fund’s stated objectives. For example, a mutual fund seeking income will likely invest in bonds or blue-chip stocks that have long track records of paying out dividends to investors. A mutual fund’s objective can be as broad as an entire market sector (technology, healthcare, energy, etc.) or as specific as limiting holdings to only companies based in Asia. There are unlimited themes.
The investments within each mutual fund are continuously changing and rebalancing. This is because the market is always evolving and fund managers are obligated to make sure the fund’s investments align with its objective. Because mutual funds are usually actively managed in this way, there are often additional costs that come with the ownership of mutual funds. More aggressive funds generally have higher expense ratios. As a result, mutual funds are typically more expensive to own than its ETF counterpart we are about to discuss below.
Exchange Traded Funds (ETFs)
Like mutual funds, exchange traded funds (ETFs) are pooled investments. Therefore, when an investor buys a share of an ETF, they are buying a piece of the fund, not the actual assets within the fund. However, unlike mutual funds, ETFs are typically passive and generally mirror an index (the S&P 500 is one example). Because they are usually passively managed, the cost of owning ETFs is often minimal. Mutual funds, by contrast, are considered actively managed.
Another major difference between mutual funds and ETFs is how they are bought and sold. When an investor sells a mutual fund share, the company “redeems” it back to the investment company at its net asset value (NAV). Once the share is redeemed, it no longer exists. ETFs, on the other hand, are not redeemed. Instead, they trade much like stocks on an exchange where two independent parties agree to buy and sell the share.
Where Merrimack Wealth Management Fits In
Our firm utilizes a wide range of different investment strategies that consist of either stocks and bonds, pooled investment securities, or a mixture of both. As independent advisors, we focus on serving your needs and always acting in your best interest as fiduciaries.
Every client’s situation is unique, and our approach reflects that. Rather than applying a one-size-fits-all model, we take the time to understand your goals, time horizon, and risk tolerance before designing a portfolio aligned with your needs. We have no obligations to proprietary products, commissions, quotas, or undisclosed conflicts of interest. While we partner with Charles Schwab as our independent custodian, our investment strategies remain fully independent and tailored to each client.
When appropriate, we often favor low-cost investment vehicles such as ETFs to help minimize expenses and allow more of your capital to remain invested and working for you. That said, there are circumstances where actively managed funds or individual securities are better suited to a client’s objectives, and we incorporate them thoughtfully when warranted.
Above all, we believe in transparency. Whether your portfolio holds individual stocks, bonds, mutual funds, or ETFs, we want you to understand what you own and why. Our goal is to make sure you never have to wonder what your money is doing.
This content is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.