Banking » Investing » ETFs vs. Mutual Funds: Which Is Best For You?
Advertiser Disclosure This website is an independent, advertising-supported comparison service. The product offers that appear on this site are from companies from which this website receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This website does not include all card companies or all card offers available in the marketplace. This website may use other proprietary factors to impact card offer listings on the website such as consumer selection or the likelihood of the applicant’s credit approval. This allows us to maintain a full-time, editorial staff and work with finance experts you know and trust. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impacts any of the editorial content on The Smart Investor. While we work hard to provide accurate and up to date information that we think you will find relevant, The Smart Investor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof. Learn more about how we review products and read our advertiser disclosure for how we make money. All products are presented without warranty.

ETFs vs. Mutual Funds: Which Is Best For You?

Many investors are confused between ETFs vs. Mutual Funds. In this guide we uncover the nuances to make informed decisions.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

We earn a commission from our partner links on this page. It doesn't affect the integrity of our unbiased, independent editorial staff. Transparency is a core value for us, read our advertiser disclosure and how we make money.

Table Of Content

Both ETFs and mutual funds offer diversified portfolios, but they differ in structure, fees, and trading flexibility. In this article, we'll compare ETFs and mutual funds to help you determine which option aligns best with your

How Do ETFs Work?

Exchange-Traded Funds (ETFs) are investment funds that are traded on stock exchanges, allowing investors to buy and sell shares.

ETFs typically track the performance of a particular index, commodity, bond, or a basket of assets. When an investor buys shares of an ETF, they are essentially buying a portion of the underlying assets held by the fund.

ETF prices fluctuate based on supply and demand in the market, but generally, they closely mirror the value of their underlying assets. This makes ETFs a popular choice for investors seeking exposure to various markets or sectors with the convenience of trading on an exchange.

Pros
Cons
Diversification
Trading fees
Liquidity
Bid-ask spread
Lower management fees
May not perfectly mirror the performance of the underlying index
Tax efficiency
Limited control
Transparency
Dividend reinvestment

How Do Mutual Fund Work?

Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities, managed by professional fund managers. When investors buy shares of a mutual fund, they effectively own a portion of the fund's holdings.

The fund's value, known as Net Asset Value (NAV), is calculated by dividing the total value of all assets in the fund by the number of shares outstanding.

Mutual funds are actively managed, meaning the fund manager makes decisions about buying, selling, and holding assets with the goal of achieving the fund's investment objectives.

Pros
Cons
Diversification
Higher fees
Professional management
Limited control
Accessibility
Lack of transparency
Convenience
Potential for underperformance
Automatic reinvestment

ETFs vs. Mutual Funds: Key Differences

ETFs and mutual funds are both investment options offering diversified portfolios, but they differ significantly in structure, trading mechanism, fees, and tax implications.

Aspect
Exchange-Traded Funds (ETFs)
Mutual Funds
Structure
Trade on stock exchanges like individual stocks.
Not traded on exchanges; transactions occur at the end of the trading day at the fund's net asset value (NAV).
Trading Mechanism
Bought and sold through brokerage accounts, offering intraday trading flexibility and price transparency.
Typically purchased directly from the fund company or through a broker, with transactions executed at the fund's NAV determined at the end of the trading day.
Fees
Generally have lower expense ratios due to passive management.
May have higher expense ratios, including management fees, sales loads, and redemption fees, especially for actively managed funds.
Tax Implications
Tend to be more tax-efficient, with fewer capital gains distributions.
May distribute capital gains to shareholders, potentially resulting in tax liabilities for investors even if they haven't sold their shares.
Transparency
Full transparency on underlying assets
Holdings disclosed daily, but less detailed
Flexibility
More flexible for active traders
Limited buying/selling options

ETFs vs. Mutual Funds: Similarities

ETFs and mutual funds, despite their differences, share several similarities:

  1. Diversification: Both ETFs and mutual funds pool money from multiple investors to invest in a diversified portfolio of assets. 

  2. Professional Management: Both investment vehicles are typically managed by experienced professionals who make investment decisions on behalf of the investors. 

  3. Investor Accessibility: ETFs and mutual funds are accessible to investors of all levels, including those with limited knowledge or time for managing investments. 

  4. Regulation: Both ETFs and mutual funds are subject to regulatory oversight to protect investors' interests. They must adhere to specific regulations set by governing bodies such as the Securities and Exchange Commission (SEC) in the United States.

  5. Dividend Reinvestment: Both ETFs and mutual funds typically offer automatic reinvestment of dividends and capital gains, allowing for compound growth over time.

When Investors May Want To Consider ETFs?

Investors might consider ETFs over mutual funds in several situations:

  • Investors seeking Lower Costs: ETFs generally have lower expense ratios than actively managed mutual funds, which can lead to higher returns over time due to compounded savings.
  • Investors Who Want Intraday Trading: ETFs trade throughout the day like stocks, allowing investors to react quickly to market changes and potentially capitalize on short-term opportunities.
  • Tax Efficiency: Some ETFs are structured to be more tax-efficient than mutual funds, particularly regarding capital gains distributions.
  • Transparency: ETFs provide full transparency on their underlying holdings, allowing investors to understand exactly what they are buying.

When Investors May Want To Consider Mutual Funds?

While ETFs offer several advantages, there are situations where mutual funds might be a better fit for investors:

  • Investors Who Want Professional Guidance: New or less experienced investors might benefit from the expertise and guidance of a fund manager who navigates complex investment decisions. Mutual funds can provide a curated portfolio based on your risk tolerance and goals.
  • Long-Term Holds Investors: For long-term investments with infrequent buying and selling, some mutual funds offer lower overall costs compared to ETFs, especially if you factor in potential commission fees for frequent ETF trades.
  • Investors Looking For Specialized Strategies: If you have specific investment goals requiring niche strategies, like target-date funds for retirement or socially responsible investing funds, mutual funds offer a wider range of options compared to ETFs.
  • Hands-Off Approach Investors: If you prefer a hands-off approach, some mutual funds automatically rebalance their portfolios to maintain their target asset allocation, saving you the effort of manually managing it.

FAQs

It depends. ETFs offer lower fees and transparency, but require more active management. Mutual funds might be easier with professional guidance, but often at a higher cost.

Often yes. Both ETFs and mutual funds frequently allow buying fractional shares with smaller amounts of money.

Yes, you'll need a brokerage account to buy and sell both ETFs and mutual funds.

Yes, but selling one and buying the other might incur transaction fees. Consider tax implications as well.

No. Actively managed mutual funds aim to beat the market, but past performance doesn't guarantee future results.

Yes, both ETFs and mutual funds offer ESG-focused options for sustainable investing

ETFs generally have lower expense ratios compared to mutual funds due to their passive management approach.

ETFs generally offer more transparency in terms of holdings, as they provide daily disclosure of their portfolios.

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Search
Banking Reviews
Best Banking Accounts
Savings Accounts
Top Offers From Our Partners

PNC bank logo

Promotion:
Up to $400 Open a new, select Virtual Wallet product and receive $500/$2,000/$5,000 or more in qualifying monthly direct deposits within 60 days to earn a $100/$200/$400 bonus.
Subject to state availability
PNC Virtual Wallet ® is available in AL, AZ, CA, CO, DC, DE, FL, GA, IL, IN, KY, MD, MI, NC, NJ, NY, NM, OH, PA, SC, TX, VA, WI, and WV. Virtual Wallet ® is offered in the state of MO with the exception of the Greater Kansas City area. Product availability may vary based on where you open your account and the Zip code of your primary address.

Chase_logo

Promotion:
$300 New Chase checking customers enjoy a $300 bonus when you open a Chase Total Checking® account and make direct deposits totaling $500 or more within 90 days of coupon enrollment.. Expired on 7/24/2024
Chase Overdraft Assist
With Chase Overdraft AssistSM, you won’t be charged an Overdraft Fee if you’re overdrawn by $50 or less at the end of the business day OR if you’re overdrawn by more than $50 and you bring your account balance to overdrawn by $50 or less at the end of the next business day

UpgradeLogo

Fees:
No monthly fees No monthly fees and no overdraft fees. Plus get reimbursed for ATM fees with an active account 
Rewards:
Up to 2% cash back Up to 2% cash back on common everyday expenses for active accounts with monthly $1,000 direct deposit, and up to 1% cash back for other purchases 

Promotion:
$300 Use Promo Code “AXOS300” for a $300 bonus when you apply for a Rewards Checking account
Up to 3.30% APY
to get the maximum rate (up to $50,000) you’ll need monthly direct deposits of $1,500 (0.40% APY), 10 transaction on your debit card (+0.30% APY), average daily balance of $2,500 on Axos Invest Managed Portfolio (+1.00% APY), average daily balance of $2,500 on Axos Invest Self Directed Trading Account(+1.00% APY) and make full monthly payment on loans (mortgage, personal and auto) with Axos account (+0.60% APY).

penfed personal loan

APY on Daily Balances
0.15% APY on daily balances of less than $20,000 or 0.35% APY on daily balances of $20,000 up to $50,000
Get paid up to 2 days early
Set up direct deposits and get your paycheck up to 2 days early

Promotion:
Up to $4,000 New customers may earn up to $4,000 when they open an eligible HSBC Premier checking account from January 8, 2024 through March 27, 2024 and complete qualifying activities:

• Receive a cash bonus of $1,500 when you deposit or invest $100,000 – $199,999.99

• Receive a cash bonus of $2,000 when you deposit or invest $200,000 – $299,999.99

• Receive a cash bonus of $2,500 when you deposit or invest $300,000 – 499,999.99

• Receive a cash bonus of $3,500 when you deposit or invest $500,000+

• Earn an extra $500 when you set up recurring monthly Direct Deposits totaling at least $5,000 for 3 months
Wealth Products & Advice
Get access to wealth products, insights and advice from an HSBC Financial Professional through HSBC Securities (USA) Inc
Advertiser Disclosure
The product offers that appear on this site are from companies from which this website receives compensation.

#1 In Banking

Our Newsletter

Get expert advice, insider tips, fresh banking promotions and rate changes on savings accounts and CDs

Banking Promotions & Latest Rate Updates

Our Banking Newsletter

Sign up for our newsletter and gain access to expert advice,
insider knowledge, and exclusive updates