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Mutual funds and exchange-traded funds (ETFs) are both baskets of investments, such as stocks or bonds, that can provide investors with diversification — but there are key differences between the two that are important for you to understand before investing. Learn about the similarities and differences between mutual funds and ETFs, including how often they can be traded and what they cost, to decide which is best suited for you.
Main Differences Between Mutual Funds and ETFs
The main differences between mutual funds and ETFs include how they’re purchased, priced and managed.
| Type of fund | Can be traded: | Costs: | Management style: | Tax implications: |
| Mutual fund | Once a day, at the end of the day | Due to their structure, mutual funds tend to come with more fees than ETFs, making them more expensive overall | Can be both actively managed and passively managed but are usually actively managed | Can generate more capital gains as fund managers are continuously rebalancing the fund |
| ETF | Throughout the trading day like a stock | Typically come with fewer fees and are less expensive than mutual funds | Can be both actively managed and passively managed but are usually passively managed | Can be more tax efficient as they tend to generate fewer capital gains |
Source: Financial Industry Regulatory Authority (FINRA)
One of the biggest differences between ETFs and mutual funds is when you can trade them: ETFs can be traded like stocks throughout the day while mutual fund trades only happen once at the end of the day. The fact that investors can buy and sell ETFs with more flexibility than mutual funds makes them more liquid — but financial advisors tend to recommend holding your investments for the long term and not trading in and out depending on price.
Another difference between these types of funds is how much they cost. ETFs tend to cost less than mutual funds (though there are exceptions) because of how they’re structured and managed. The expense ratio, which is the total cost of a fund, for mutual funds can include more fees than those for ETFs, like 12b-1 fees. The operating costs for mutual funds also tend to be higher since mutual funds are typically actively managed while ETFs are more often passively managed, which is another main difference between these two types of funds.
Actively managed mutual funds place fund managers in charge of allocating assets and passively managed ETFs aim to mimic an index, like the S&P 500. However, both mutual funds and ETFs can be either passively or actively managed. Mutual funds can also have an investment minimum while ETFs typically do not.
These funds also differ in their tax treatment. ETFs will typically generate fewer taxable events — resulting in fewer capital gains taxes for investors — because they usually don’t have an active manager trading in and out of securities in the same way mutual funds do.
| Did you know? |
| In the United States in 2022, mutual funds had $22.1 trillion in total net assets, while ETFs had $6.5 trillion in assets. While mutual funds have historically attracted more assets than ETFs, ETFs are catching up, accounting for 30% funds’ total net assets, up from 20% five years ago. |
Source: Investment Company Institute’s 2023 Fact Book and Morningstar’s 3 Best New ETFs of 2023
Similarities Between Mutual Funds and ETFs
While there are key differences between ETFs and mutual funds, they also have a lot in common. Mutual funds and ETFs both:
- Can add diversification to a portfolio
- Because mutual funds and ETFs are both baskets of securities, such as a collection of stocks or bonds, they provide exposure to more investments than an investor would get from just investing in one stock or bond.
- Are not insured by the FDIC
- Unlike money you put into a savings account, investments in mutual funds and ETFs are not FDIC-insured. While your money is insured up to $500,000 (including $250,000 in cash) per account by the Securities Investor Protection Corporation (SIPC) in case your brokerage collapses, that insurance doesn’t cover money you may lose due to an investment losing value after you purchase it.
- Have fees
- While mutual funds and ETFs face different fees, they differ in type. It’s important to understand exactly what fees you’ll be paying before investing.
- Are managed by investment advisors
- While ETFs and mutual funds can be actively or passively managed, both types of funds are overseen by professionals and regulated by the Securities and Exchange Commission (SEC).
- Have affordable options
- Mutual funds can have high investment minimums, but some set relatively low dollar amounts for the initial purchase, subsequent monthly purchases, or both. ETF shares can be purchased for just the price of one share. Many brokerages also offer fractional shares, meaning you can invest with less than the amount of a single share.
- Come with risk
- Investing in mutual funds and ETFs tends to be less risky than investing in an individual stock, since you’re spreading your money out across a basket of stocks or another asset. But like with all investments, mutual funds and ETFs come with the risk of losing money, especially if you’re not investing for the long term.
Should You Choose a Mutual Fund or ETF?
The decision to invest in a mutual fund or ETF will come down to your specific financial situation, goals and time horizon — and it may make sense for you to have both types of funds in your portfolio.
But if you’re choosing between the two, a mutual fund may be the best fit if you are seeking an investment that could outperform the overall market, since active managers of mutual funds are aiming to do just that while ETFs are typically just looking to mirror a market index. But with a mutual fund, your trades can be more restricted compared to an ETF since you can only buy or sell once a day.
If you’re seeking a lower-cost option that may be more tax efficient, an ETF could fit your investment needs. Most ETFs are passively managed, which reduces the number of fees and taxable events.
Whether you’re investing in ETFs, mutual funds or both, it wouldn’t hurt to speak with a financial advisor who can help you understand the differences and ensure you’re making a decision that aligns with your overall investing goals
Sources:
Armor, B. (2023, November 7). 3 Best New ETFs of 2023. Retrieved from https://www.morningstar.com/etfs/3-best-new-etfs-2023
Investment Company Institute. (2023). Fact Book. Retrieved from https://www.ici.org/system/files/2023-05/2023-factbook.pdf
FINRA. (2022, November 10). Mutual Fund vs ETF: What’s the Difference? Retrieved from https://www.finra.org/investors/insights/etf-vs-mutual-fund
U.S. Securities and Exchange Commission. (n.d.). Mutual Funds and ETFs. Retrieved from https://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf
