ETFs vs Mutual Funds (2024)

Table of Contents

Want to learn more? ETF or mutual fund? Which is right for you? Consider an ETF, if: Consider an index mutual fund, if: Consider an actively managed mutual fund, if: ETFs and mutual funds, at a glance: ETFs and mutual funds, at a glance: Want to learn more about ETFs and Mutual Funds? Need help understanding your ETF options? FAQs

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.

Want to learn more?

How to choose ETFs vs. Mutual Funds

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.
See Also
A New Take on the Active vs. Passive Investing Debate | Morgan Stanley The 4 Best Passive Income Investments T. Rowe Price Says Actively Managed Funds Outperform Passive Funds 73% of the Time - SmartReads by SmartAsset The benefits and risks of passive investing | Barclays Smart Investor
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 bondsoremerging markets–there may be greater opportunities through active portfolio management.

ETFs and mutual funds, at a glance:

ETFs and mutual funds at a glance

>
Passive ETFs

Passive ETFs
>
Active ETFs

Active ETFs
>
Index Mutual Funds Tooltip

Index Mutual Funds Tooltip

>
Actively Managed Mutual Funds Tooltip

Actively Managed Mutual Funds Tooltip
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- Expense Ratio (OER) Tooltip
  >
- 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 lower than actively managed mutual funds.
  >
- Actively Managed Mutual Funds Tooltip
  
  Generally higher than passively managed, index-tracking funds
  >
  - Performance
    >
  - Passive ETFs
    
    Performance generally seeks to track a benchmark index
    >
  - Active ETFs
    
    Performance seeks to outperform a benchmark index.
    >
    See Also
    Active Vs Passive Funds Investing | Investment – HSBC Expat
  - 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
    >
    
    Passive ETFs
    
    About 2,000
    >
    
    Active ETFs
    
    Over 700 actively managed ETFs and over 45 active semi-transparent ETFs
    >
    
    Index Mutual Funds Tooltip
    
    About 500*
    >
    
    Actively Managed Mutual Funds Tooltip
    
    About 7,000*
    >
    
    Trading
    >
    
    Passive ETFs
    
    Intraday
    >
    
    Active ETFs
    
    Intraday
    >
    
    Index Mutual Funds Tooltip
    
    End of Day
    >
    
    Actively Managed Mutual Funds Tooltip
    
    End of Day
    >
    
    Price
    >
    
    Passive ETFs
    
    Market price Tooltip
    >
    
    Active 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
    >
    
    Passive ETFs
    
    Most efficient
    >
    
    Active ETFs
    
    Efficient
    >
    
    Index Mutual Funds Tooltip
    
    Efficient
    >
    
    Actively Managed Mutual Funds Tooltip
    
    Less efficient
    >
    
    Holdings Transparency
    >
    
    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
    
    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, December 2021
    
    Want to learn more about ETFs and Mutual Funds?
    
    Explore additional topics in our Understanding ETFs and Mutual Funds Insights sections:
    
    Types of ETFs
    
    ETFs at Schwab
    
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FAQs

ETFs can be bought and sold just like stocks, while mutual funds can only be purchased at the end of each trading day. Actively managed funds tend to have higher fees and higher expense ratios due to their higher operations and trading costs.

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

An index fund is a type of mutual fund that tracks a particular market index: the S&P 500, Russell 2000, or MSCI EAFE (hence the name). Because there's no original strategy, not much active management is required and so index funds have a lower cost structure than typical mutual funds.

Investment Strategy

Suitable for investors looking for cost efficiency and ease of trading. Bond ETFs often have lower expense ratios than bond funds. This is because ETFs have passive management. Bond funds may have higher expenses because of the active management and the costs associated with mutual fund operations.

As we covered earlier, infrequently traded ETFs could have wide bid/ask spreads, meaning the cost of trading shares of the ETF could be high. Mutual funds, by contrast, always trade without any bid-ask spreads.

The short answer is that it depends on the specific ETF or mutual fund in question. In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges.

Market risk

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.

ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.

At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

One of the ways that investors make money from exchange traded funds (ETFs) is through dividends that are paid to the ETF issuer and then paid on to their investors in proportion to the number of shares each holds.

I put my personal 401(k) and a lot of my mutual fund investing in four types of mutual funds: growth, growth and income, aggressive growth, and international. I personally spread mine in 25% of those four.

Key Takeaways. Many mutual funds are actively managed while most ETFs are passive investments that track the performance of a particular index. ETFs can be more tax-efficient than actively managed funds due to their lower turnover and fewer transactions that produce capital gains.

The administrative costs of managing ETFs are commonly lower than those for mutual funds. ETFs keep their administrative and operational expenses down through market-based trading. Because ETFs are bought and sold on the open market, the sale of shares from one investor to another does not affect the fund.

Key takeaways. Buying individual bonds can provide increased control and transparency, but typically requires a greater commitment of time and financial resources. Investing in bond funds can make it easier to achieve broad diversification with a lower dollar commitment, but offers less control.

ETFs are generally considered more tax-efficient than mutual funds, owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.

ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.

ETFs vs Mutual Funds (2024)

Want to learn more?

ETF or mutual fund? Which is right for you?

Consider an ETF, if:

Consider an index mutual fund, if:

Consider an actively managed mutual fund, if:

ETFs and mutual funds, at a glance:

ETFs and mutual funds, at a glance:

Need help understanding your ETF options?

FAQs

ETFs vs Mutual Funds? ›

Do you pay taxes on ETFs if you don't sell? ›