ETFs vs. mutual funds

They're similar—but they're different in some very key ways. We'll help you compare.

How are ETFs and mutual funds alike?

  • stacked trapezoid image

    Similar structure

    Biggest similarity: both represent managed "baskets" or "pools" of individual securities, for example stocks or bonds.

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    Exposure opportunity

    ETFs (exchange-traded funds) and mutual funds both offer exposure to a wide variety of asset classes and niche markets. They generally provide more diversification than a single stock or bond, and they can be used to create a diversified portfolio when funds from multiple asset classes are combined.  
     


How are ETFs and mutual funds different?

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  ETFs Mutual Funds

How are they managed?

While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index.

Mutual funds come in both active and indexed varieties, but most are actively managed. Active mutual funds are managed by fund managers.

How are they traded?

ETFs trade like stocks and are bought and sold on a stock exchange, experiencing price changes throughout the day. This means that the price at which you buy an ETF will likely differ from the prices paid by other investors.

Mutual fund orders are executed once per day, with all investors on the same day receiving the same price.

What’s the minimum investment?

Because they trade like stocks, ETFs do not require a minimum initial investment and are purchased as whole shares. You can buy an ETF for the price of just one share, usually referred to as the ETF's "market price."

Minimum initial investments for mutual funds are normally a flat dollar amount and aren’t based on the fund's share price.

Unlike ETFs, mutual funds can be purchased in fractional shares or fixed dollar amounts.

What are the costs?

ETFs have implicit and explicit costs. While your broker will disclose the cost of trading commissions and the ETF provider will disclose the operating expense ratio, don't overlook the bid/ask spread and premium/discount to NAV. These costs are implicit and result from buying or selling an ETF in the market at a price which may differ from the value of the ETF's underlying holding.

 

Read ETFs: How much do they really cost?

Mutual funds can be purchased without trading commissions, but in addition to operating expenses they may carry other fees (for example, sales loads or early redemption fees).

What about tax efficiency?

ETFs often generate fewer capital gains for investors since they may have lower turnover and can use the in-kind creation/redemption process to manage the cost basis of their holdings.

A sale of securities within a mutual fund may trigger capital gains for shareholders—even for those who may have an unrealized loss on the overall mutual fund investment.


ETF or mutual fund? Which is right for you?

That all depends on your goals and the type of investor you are.

Consider an ETF, if:

  • You trade actively

    Intraday trades, stop orders, limit orders, options, and short selling—all are possible with ETFs, but not with mutual funds.
     

  • You're tax sensitive

    ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. 

    And, in general, ETFs tend to be more tax efficient than index mutual funds.
     


Consider an index mutual fund, if:

  • You invest frequently

    If you make regular deposits—for example, you use dollar-cost averaging—a no-load index mutual fund can be a cost-effective option, and it allows you to fully invest the same dollar amount each time (since mutual funds can be purchased in fractional shares).

  • Similar ETFs are thinly traded

    When you buy or sell ETF shares, the price may be less than the net asset value (or, NAV) of the ETF. This discrepancy (aka: the "bid/ask spread") is often nominal, but for less actively traded ETFs, that might not always be the case.

    By contrast, mutual funds always trade at NAV, without any bid/ask spreads.


Consider an actively managed mutual fund, if:

  • You're looking for a fund that could potentially beat the market

    People invest in actively managed mutual funds in hopes they'll surpass their benchmarks.

    Also, actively managed funds acquired as part of a specific strategy may complement index funds in a portfolio, and help to reduce downside risk and mitigate market volatility.

  • You're investing in a less efficient market

    Some markets are "highly efficient"—which means they’re so popular, there isn't much opportunity to add any real value via active portfolio management.

    But in less efficient markets–like high-yield bonds, or new, emerging markets–there may be greater opportunities through active portfolio management.
     

ETFs and mutual funds, at a glance:

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  ETFs Index Mutual Funds Tooltip Actively Managed Mutual Funds Tooltip

Expense Ratio (OER) Tooltip

ETFs

Generally lower than actively managed mutual funds.

Index Mutual Funds Tooltip

Generally lower than actively managed mutual funds.

Actively Managed Mutual Funds Tooltip

Generally higher than passively managed, index-tracking funds.

Performance

ETFs

Performance generally seeks to track a benchmark index, although some ETFs are actively managed and will seek to outperform a benchmark.

Index Mutual Funds Tooltip

Performance seeks to track a benchmark index.

Actively Managed Mutual Funds Tooltip

Performance seeks to outperform a benchmark index.

Selection of Funds

ETFs

About 2,000

Index Mutual Funds Tooltip

About 500*

Actively Managed Mutual Funds Tooltip

About 8,000*

Trading

ETFs

Intraday

Index Mutual Funds Tooltip

End of Day

Actively Managed Mutual Funds Tooltip

End of Day

Price

ETFs

Market price Tooltip

Index Mutual Funds Tooltip

NAV (Net Asset Value) Tooltip

Actively Managed Mutual Funds Tooltip

NAV (Net Asset Value) Tooltip

Potential Tax Efficiency Tooltip

ETFs

Most efficient

Index Mutual Funds Tooltip

Efficient

Actively Managed Mutual Funds Tooltip

Less efficient

Holdings Transparency

ETFs

Holdings generally reported daily

Index Mutual Funds Tooltip

Holdings generally reported monthly or quarterly

Actively Managed Mutual Funds Tooltip

Holdings generally reported monthly or quarterly

*Oldest share classes of funds available in the U.S. as reported by Morningstar Direct, March 2018


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