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Exchange-traded funds (ETFs) vs. mutual funds
Both types of funds group different investments together into a basket that can be narrowly focused or span entire trading indexes. The main differences are in how and when you can buy or sell them.
What are the differences between ETFs and mutual funds?
First, let’s start with some similarities. Both ETFs and mutual funds are popular investment vehicles that offer a great way to diversify your portfolio. Both are overseen by professional portfolio managers and work by grouping various investments into a larger bucket called a fund. This is often considered beneficial over purchasing individual stocks, because the risk and volatility are spread out instead of concentrated on any one asset. The investments inside the fund can vary dramatically, and could include:
- stocks following a specific industry
- high-growth companies across sectors
- entire market indexes like the S&P 500
Where ETFs and mutual funds differ is in purchasing and selling. ETFs operate similarly to individual stocks. They are traded in whole shares, and you can buy or sell them during the trading day as market prices fluctuate. Mutual funds can be purchased in fractional shares and are only priced and traded at the end of each trading day. Beyond that, the differences will come down to the individual funds you choose to invest in.
Related: What is an ETF?
Related: What is a mutual Fund?
Compare ETFs and mutual funds
For most casual investors, whether you can buy and sell them multiple times a day or only once at the end of the day isn’t much of a concern. However, there are other differences between ETFs and mutual funds. Since ETFs are traded on an exchange, their prices may be affected by factors other than the changes in share price of the underlying stocks or bonds in a mutual fund.
And there is a caveat: Each individual fund is going to have different minimums, fees, and options regardless of the type. With a wide variety of each investment type now available, you should consider these general guidelines, which will vary across individual funds. Both mutual ETFs and mutual funds are sold only by prospectus. You should read a prospectus before investing.
Variety of investment choices
Mutual funds have been around for a long time, and their popularity has stayed consistent. ETFs are newer, and the options have grown rapidly over the past 10 years. Now, both ETFs and mutual funds offer a wide variety of choices to fit nearly all investment goals and styles.
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In 2023, there were 3,243 ETF options available in the U.S.1 |
As of June 2024, there were 8,582 mutual funds in the United States.2 |
Minimum investment requirements
Whether you have $1 million or $100, you can find both ETFs and mutual funds to fit your budget. Prices vary by fund, and some sought-after options have a higher bar of entry.
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Since they are traded like stocks, there is no minimum investment beyond the price of a single share of the ETF. This is known as the market price. |
Most mutual funds have a minimum investment amount, ranging from around $500 to $3,000. However, some are much higher, while others have $0 minimums. |
Differences in costs
Both mutual funds and ETFs have various costs to buy, sell, and operate the fund, but they are often applied differently. Even among funds of the same type, these differences can be pronounced. For example, index funds are a type of mutual fund that has low fees. It’s important to understand all the associated costs and how they can affect the growth of your portfolio before purchasing any investment. Generally speaking:
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Can be actively or passively managed, so fees can vary significantly and often have trading commissions. |
More likely to be actively managed, which can mean higher fees but typically no trading commissions. |
Which are better: ETFs or mutual funds?
Neither ETFs nor mutual funds are inherently better than the other. They both offer benefits for different investment strategies. Which you decide on will entirely depend on your current investments, goals, and available funds. Look into some of your options for exchange-traded funds and mutual funds.
For most investors, focusing on which investments are in a fund is likely more important than what type of fund it is. A licensed financial professional can help you form a plan that is in line with your retirement goals.
ETFs vs. mutual funds FAQs
The returns are mostly based on the investments within the funds, regardless of whether it’s an ETF or a mutual fund, with a couple of notable distinctions: Returns for an ETF may be shown on a net asset value basis or a market price basis, while returns for a mutual fund may be shown on a net asset value basis or on a basis reflecting the deduction of any sales charge. There’s also a standard SEC-required basis on which to calculate mutual fund performance, which is not the case for an ETF. Fees can play a big role in returns as well, but those vary significantly among the different options.
Stocks allow you to purchase shares of one specific company. Therefore, they can be a volatile investment. ETFs and mutual funds, on the other hand, generally include many investments bundled together and may be less volatile. However, they do involve market risk, and investment losses are possible.
ETFs are often considered more tax efficient because you only pay capital gains taxes when you sell them. The investments within mutual funds can be traded by the fund manager and may incur these types of taxes more regularly.
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1“Number of Exchange-Traded Funds (ETFs) in the United States from 2003 to 2023,” Statista, 2023.
2“Mutual Funds – Statistics and Facts,” Statista, 2023.