ETFs vs Mutual Funds
See how ETFs and mutual funds differ in trading, fees, and taxes, and how to pick the right one for your account.
TL;DR
- An
ETFtrades all day at live prices like a stock; amutualFundsettles once a day after close. - Both can track the same index, so the
expenseRatiomatters far more than the wrapper. - In a taxable account, ETFs usually pass along fewer surprise
capitalGainsthan mutual funds.
How Each One Trades
ETFs Trade All DayBuy or sell anytime the market is open, at a live price.
Price updates all day, like a stockMutual Funds Trade OnceEvery order settles after close at that day's single price.
One price per day, after 4pm ETWhat NAV MeansA fund's per-share value is its assets divided by its shares.
$1B assets / 50M shares = $20 NAVOrder TypesETFs allow limit and stop orders; mutual funds do not.
Limit orders: ETFs onlyWhat You Pay
Expense RatioThe yearly percentage skimmed automatically from fund assets.
0.05% = $5/yr per $10,000Sales LoadsSome mutual funds charge a fee just to buy in.
Avoid front-end loads up to 5%Bid-Ask SpreadA tiny gap between buy and sell price on ETFs.
Big ETFs: spread is a few cents12b-1 FeesMarketing fees baked into some funds' expense ratios.
Skip funds carrying 12b-1 chargesTaxes in a Brokerage Account
ETF Tax EfficiencyTheir structure avoids handing out most capital gains.
ETFs rarely spit out taxable gainsMutual Fund DistributionsYou can owe tax even in a year you never sold.
Other sellers can trigger your billAsset LocationPut tax-messy funds inside IRAs and 401(k)s.
Mutual funds in IRA, ETFs taxableSame Index, Different WrapperBoth can track the identical benchmark under the hood.
S&P 500 ETF vs S&P 500 mutual fundWhich Should You Pick?
Auto-Investing Exact DollarsMutual funds make recurring exact-dollar buys simple.
$300/mo auto into a fundFractional ETFsMany brokers now let you buy partial ETF shares too.
$300 -> partial ETF sharesTaxable Account EdgeETFs usually win on taxes outside retirement accounts.
Taxable account? Lean ETFThe Real LeverWhatever you choose, the fee matters most of all.
Lowest-cost broad fund winsTips
- Use low-cost index
ETFsin a taxable brokerage account to avoid the surprise capital-gains payouts mutual funds can hand you at year end. - Use a
mutualFundif you want to auto-invest an exact dollar amount and your broker does not support recurring fractional ETF buys.
Warnings
- Avoid trading
ETFshares in the first and last fifteen minutes of the day, when prices swing widest and spreads are largest. - Read the prospectus for front-end
salesLoads; a 5% load means only $9,500 of every $10,000 ever reaches the market.
In Practice
Compare the same $10,000 in a low-cost ETF versus a pricier mutual fund.
You put $10,000 into a 0.05% ETF and, separately, into a 0.85% mutual fund for 10 years at 7% gross.
- ETF net return: 7% - 0.05% = 6.95%; $10,000 x 1.0695^10 = about $19,578.
- Mutual fund net return: 7% - 0.85% = 6.15%; $10,000 x 1.0615^10 = about $18,162.
- Difference: $19,578 - $18,162 = about $1,416.
- Both tracked the same market; only the fee changed the result.
The low-cost ETF leaves you about $1,416 richer over ten years.
The wrapper matters a little; the expense ratio matters a lot.
FAQ
Not always. Index ETFs usually beat active mutual funds on cost, but the big providers offer index mutual funds with fees just as low, sometimes lower. Compare the actual expense ratios rather than assuming one type is cheaper.
When other shareholders cash out of a mutual fund, the manager may have to sell holdings to raise cash, and any gains get passed to everyone still in the fund. ETFs are built to avoid most of this, which is why they are handy in taxable accounts.
No. Mutual funds trade once a day at the closing net asset value, so there is no live price to set a limit against. Limit and stop orders only work on exchange-traded things like ETFs and stocks.
Either is fine if it is a broad, low-cost index fund. Pick a mutual fund if you love simple auto-investing of exact dollar amounts; pick an ETF if you want intraday trading or the extra tax efficiency in a taxable account. The fee decides more than the format.