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.

  • pie chart image

    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?

  • ETFs

    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

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

  • ETFs

    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 Funds

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

  • What's the minimum investment?

  • ETFs

    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."

  • Mutual Funds

    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.

  • ETFs

    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.

  • Mutual Funds

    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

    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.

  • Mutual Funds

    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.

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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 emerging markets–there may be greater opportunities through active portfolio management.

ETFs and mutual funds, at a glance:

ETFs and mutual funds, at a glance:

ETFs and mutual funds at a glance

  • Expense Ratio (OER) Tooltip OERs are charged annually by the fund company, expressed as a percentage of a fund's average net assets. They cover the fund's management, sales, and distribution costs. Comparisons based on the ICI research perspective.

  • Passive ETFs

    Generally lower than actively managed mutual funds.

  • Active ETFs

    Generally higher than passive ETFs; on par with a mutual fund's institutional share class.

  • Index Mutual Funds Tooltip Generally more efficient due to lower turnover – index tracking tends to result in fewer purchases and sells, lowering the potential for capital gains.

    Generally lower than actively managed mutual funds.

  • Actively Managed Mutual Funds Tooltip Generally less efficient due to higher turnover – greater potential for capital gains due to a larger number of purchases and sells by active managers.

    Generally higher than passively managed, index-tracking funds

  • Passive ETFs

    Performance generally seeks to track a benchmark index

  • Active ETFs

    Performance seeks to outperform a benchmark index.

  • Index Mutual Funds Tooltip Generally more efficient due to lower turnover – index tracking tends to result in fewer purchases and sells, lowering the potential for capital gains.

    Performance seeks to track a benchmark index.

  • Actively Managed Mutual Funds Tooltip Generally less efficient due to higher turnover – greater potential for capital gains due to a larger number of purchases and sells by active managers.

    Performance seeks to outperform a benchmark index.

  • Active ETFs

    Actively managed ETFs about 350, active semi-transparent about 10

  • Index Mutual Funds Tooltip Generally more efficient due to lower turnover – index tracking tends to result in fewer purchases and sells, lowering the potential for capital gains.

    About 500*

  • Actively Managed Mutual Funds Tooltip Generally less efficient due to higher turnover – greater potential for capital gains due to a larger number of purchases and sells by active managers.

    About 7,000*

  • Index Mutual Funds Tooltip Generally more efficient due to lower turnover – index tracking tends to result in fewer purchases and sells, lowering the potential for capital gains.

    End of Day

  • Actively Managed Mutual Funds Tooltip Generally less efficient due to higher turnover – greater potential for capital gains due to a larger number of purchases and sells by active managers.

    End of Day

  • Passive ETFs

    Market price Tooltip An exchange-traded fund's market price is the price at which shares in the ETF can be bought or sold on the exchanges during trading hours.

  • Active ETFs

    Market price Tooltip An exchange-traded fund's market price is the price at which shares in the ETF can be bought or sold on the exchanges during trading hours.

  • Index Mutual Funds Tooltip Generally more efficient due to lower turnover – index tracking tends to result in fewer purchases and sells, lowering the potential for capital gains.

    NAV (Net Asset Value) Tooltip Is the sum total of the market value of all the shares held in the portfolio including cash, less the liabilities, divided by the total number of units, outstanding.

  • Actively Managed Mutual Funds Tooltip Generally less efficient due to higher turnover – greater potential for capital gains due to a larger number of purchases and sells by active managers.

    NAV (Net Asset Value) Tooltip Is the sum total of the market value of all the shares held in the portfolio including cash, less the liabilities, divided by the total number of units, outstanding.

  • Potential Tax Efficiency Tooltip ETFs - Generally the most efficient due to lower turnover and in-kind creation/redemption (which allows ETF managers to optimize the cost basis of the securities held by the fund).

  • Passive ETFs

    Most efficient

  • Index Mutual Funds Tooltip Generally more efficient due to lower turnover – index tracking tends to result in fewer purchases and sells, lowering the potential for capital gains.

    Efficient

  • Actively Managed Mutual Funds Tooltip Generally less efficient due to higher turnover – greater potential for capital gains due to a larger number of purchases and sells by active managers.

    Less efficient

  • Passive ETFs

    Holdings generally reported daily

  • Active ETFs

    Active semi-transparent ETFs generally report full holdings on a monthly or quarterly basis, whereas actively managed ETFs will report holdings daily

  • Index Mutual Funds Tooltip Generally more efficient due to lower turnover – index tracking tends to result in fewer purchases and sells, lowering the potential for capital gains.

    Holdings generally reported monthly or quarterly

  • Actively Managed Mutual Funds Tooltip Generally less efficient due to higher turnover – greater potential for capital gains due to a larger number of purchases and sells by active managers.

    Holdings generally reported monthly or quarterly

*Oldest share classes of funds available in the U.S. as reported by Morningstar Direct, July 2019

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