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ETFs vs mutual funds—What’s the difference?
Written by: New York Life Editorial Team
Reviewed by: New York Life Compliance Team
Updated: October 29, 2026
Both ETFs and mutual funds pool investments into funds that may hold a variety of securities or focus on particular investment strategies. Their key differences include how they are traded, their costs, and potential tax implications. that can be narrowly focused or span entire trading indexes. The main differences are in how and when you can buy or sell them.
Key takeaways
- ETFs and mutual funds both offer diversification, but differ in how they’re traded, their costs, and minimum investment requirements.
- ETFs are often more tax-efficient in taxable accounts, while fees and tax implications vary by fund and account type.
- Neither option is inherently better or safer; the right choice depends on your investment goals, risk tolerance, and financial strategy.
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 in the 2000s, the options have grown rapidly. These include new asset classes such as bonds and international stocks, which appeal to retail and institutional investors. 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 2026, there were 5,401 ETF options available in the U.S.1 |
As of August 2026, there were 6,636 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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ETFs generally do not have a minimum investment beyond the cost of a share, although some brokerage platforms permit fractional share purchases. This is known as the market price. |
Most mutual funds have a minimum investment amount, ranging from around $1,000 to $3,000. However, some are much higher, while others have $0 minimums. |
Differences in cost
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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May be actively or passively managed. Costs include fund operating expenses and may include brokerage commissions and trading costs, such as bid-ask spreads. |
May be actively or passively managed. Costs include fund operating expenses and may include sales charges, transaction fees, or other expenses. |
How are ETFs and mutual funds taxed?
ETFs and mutual funds are taxed similarly for dividends and capital gains (when they’re sold).
Tax efficiency and the in-kind redemption process
ETFs are generally more tax-efficient because their structure allows them to minimize distribution of internal capital gains to investors. The tax treatment of mutual funds depends on the type of account you hold them in and whether you receive distributions or sell your shares.
Capital gains distributions and the in-kind redemption process
Investors may receive capital gains distributions without selling shares. These occur when a fund sells appreciated securities and can happen even with tax-efficient funds, particularly after prolonged market gains.
In-kind distributions can be used by ETFs to make payments in the form of securities or property instead of cash when the shares are redeemed. This process can reduce taxable capital gains distributions to shareholders, although such distributions may still occur.
Dividends
There are dividend-focused ETFs and mutual funds that collect income from stocks and bonds and distribute it to investors. Dividend ETFs trade throughout the day at market prices, while dividend mutual funds are priced and traded once daily after market close at their net asset value.
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.
When an ETF may be the better fit
An ETF may be a better choice than a mutual fund if you prioritize lower costs (ETFs generally feature lower median expense ratios than mutual funds), the flexibility to trade throughout the day, or greater tax efficiency in a taxable brokerage account.
Many ETFs target specific industries or commodities and can provide access to specialized market segments.
When a mutual fund may be the better fit
No-load mutual funds generally do not impose sales loads, although operating expenses and other fees may apply. They also typically allow investors to invest specific dollar amounts through fractional share purchases.
While index mutual funds may not offer the same niche exposure as ETFs, there are actively managed mutual funds that focus on specific sectors, though they often carry higher management fees.
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 more tax-efficient in taxable accounts because their structure can reduce capital gains distributions. However, investors may still owe taxes on distributions received and on gains realized when selling their shares.
Both ETFs and mutual funds involve investment risk. and active funds rely on a portfolio manager’s investing decisions; single-sector ETFs carry greater risk due to the lack of diversification, and frequent trading can create more opportunities for market losses—ETFs are not inherently safer than mutual funds. A fund’s risk level depends primarily on its underlying investments—stocks, bonds, commodities—and its investment strategy, rather than its structure.
Yes, diversifying investments is a beneficial investment strategy, so try to make sure your ETFs and mutual fund investments (stocks, bonds, real estate, etc.) are not overlapping. To create a more diversified portfolio, combine funds that cover different asset classes and market segments; for example, pairing a U.S. stock market ETF with an international bond mutual fund to broaden your exposure across investments. A licensed financial professional can help you build an investment strategy, select mutual funds, and coordinate your investments.
Both ETFs and mutual funds can be appropriate for retirement accounts. In tax-advantaged accounts, the tax-efficiency differences between the two are generally less relevant. Investors should consider each fund’s investment strategy, fees, risks, and suitability for their retirement goals.
Related content
All investments involve risk, including loss of principal.
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1“The State of US ETF Market 2026,” Morningstar, September 28, 2026.
2“Release: Trends in Mutual Fund Investing, August 2026,” Investment Company Institute, September 29, 2026.