ETF vs. Mutual Fund: What’s The Difference? (2024)

One of the most important rules of investing is to always diversify your portfolio. Mutual funds and exchange-traded funds (ETFs) both provide a great source of diversification, but at first glance it can be hard to tell the difference between these two types of funds.

While there are more than a few similarities between mutual funds and ETFs, there are also key differences that investors should be aware of before taking the plunge.

Understanding Mutual Funds and ETFs

Both mutual funds and ETFs are pooled investment funds that sell shares to investors. The proceeds are invested in a basket of stocks, bonds, or other assets, and every fund has stated investment objectives and takes on different levels of risk.

Investing experts manage the portfolio of securities owned by either type of fund. They make decisions about which assets to purchase and when to maximize returns for the investors. Both types of funds are traded on major stock exchanges.

Although mutual funds are still more popular than ETFs, ETFs are gaining ground. According to a recent survey by the Investment Company Institute, full-service brokers invested just 6% of their clients’ portfolios in ETFs in 2011. In 2021, that percentage jumped to 21%.

Similarities Between ETFs and Mutual Funds

• Great sources of diversification. ETFs and mutual funds both provide you with easy access to well-diversified portfolios of investment securities. When you buy either type of fund, you’re investing in tens if not hundreds of stocks or bonds at once.
• Professional management. Both types of funds are managed by professional managers who use their expertise to make decisions about which securities to own. You can choose between actively and passively-managed funds. The former attempt to beat the market’s performance, while the latter aim to replicate the performance of market indices like the S&P 500.
• Multiple investment options. There’s a very broad range of different types of mutual funds and ETFs available to purchase. You can opt for international or domestic stocks, different industries or market sectors, and specialized investing strategies like growth stocks or value investing.
• Great choice for long-term investors. For long-term investors who are saving for retirement or other goals, mutual funds and ETFs can be better options than individual stocks.

Differences Between Mutual Funds and ETFs

• ETFs have lower investment minimums. In general, ETFs have lower investment minimums than mutual funds. For beginner investors, the lower minimum can make investing more accessible.
• Mutual funds are traded once per day. Mutual funds are only traded once per day at the closing market price, which means that mutual fund investors don’t know what their returns will be until after the markets close. ETFs, on the other hand, can be traded throughout the day and investors know exactly what they’re buying and selling. Investors can also use different order types, such as limit orders, to control the price at which they buy or sell ETFs.
• ETFs are often cheaper.ETFs typically have a cost advantage over mutual funds. They usually have lower expense ratios and lower fees overall.

ETF vs. Mutual Fund: Which Is Better for You?

When it comes to ETFs vs mutual funds, it can be tough to make a choice. There are many similarities between them, and they both allow investors to invest in a variety of securities and diversify their portfolios.

Regardless of which investment product you choose, complete the following steps before investing your hard-earned money:

• Decide on a management style. Both ETFs and mutual funds can be passively-managed, but there are also actively-managed funds available. If you prefer a hands-off approach to investing, passively-managed funds may be a better option since they have lower costs than actively-managed funds.
• Have a goal in mind. Before investing, consider your financial goals and target time horizon. If you have several decades before you’ll need your money, broad funds that invest in stocks may be a good choice. But if you will need the money within the next few years, you may need a more conservative fund that invests in bonds or lower-risk securities.
• Read the fund prospectus. ETFs and mutual funds are required to provide their prospectus to investors, but you can also look up a fund’s prospectus through the Securities and Exchange Commission (SEC). The prospectus outlines the fund’s investment objective, risk and fees, allowing you to get critical information before you invest your money. You can look up a fund’s prospectus on the SEC’s website.

If you need help deciding on an investment product or investment strategy, consult with a financial advisor to get professional and personalized advice.