Exchange-traded funds (ETFs) and mutual funds both hold a basket of stocks, bonds, currencies or commodities. Because of that, they can instantly diversify your holdings through a single investment. This can be ideal for retirement and hands-off investors who want to avoid picking stocks or other assets themselves.
ETF vs mutual fund
ETFs are traded on exchanges like stocks, while mutual funds are traded at the end of each trading day.
You can buy ETFs with most platforms while only the largest brokerages, like Interactive Brokers, offer mutual funds.
Invest in ETFs for as low as $1 with $0 commission, while the minimum to invest in mutual funds is often $1,000 and it can cost up to $50 in commissions.
ETFs vs mutual fund: Similarities and differences
ETF
Mutual fund
How ETFs and mutual funds are managed: active or passive
ETFs are typically passive funds, meaning there’s little management over their investments. They automatically track an index — like the S&P 500 or Nasdaq 100 — and the performance closely matches the index. There are actively managed funds, such as Cathie Wood’s ARK funds where they actively buy and sell stocks to try and outperform the S&P 500.
Mutual funds are known for being actively managed, even though some are passively managed, meaning they track an index as an ETF would. Actively managed mutual funds can cost slightly more to own than ETFs because they require people to make those decisions and execute them.
How they’re traded
ETFs are traded on exchanges. This means you can buy or sell them as you would any other stock on the market, during a trading session at the current price. This gives you greater flexibility, and you can use almost any broker or trading platform to buy ETFs.
Mutual funds are traded and priced at the end of each trading day. Typically, large and established brokerages like Vanguard and Interactive Brokers offer mutual funds, while newer trading platforms like Webull and Robinhood don’t.
How much they cost
ETFs often have low or no buy fees. Most brokers these days, including SoFi® and Robinhood, offer $0 commission on ETF trades. What’s more, ETFs often have a lower expense ratio — i.e. an annual fee to own the fund — of less than 0.4% on average. That’s $4 each year for every $1,000 invested. However, most index ETFs, such as the S&P 500 ETF cost around 0.03% or $0.3 for every $1,000 invested.
Depending on the broker and the mutual fund, it can cost you up to $50 to buy the fund. Some brokers offer numerous mutual funds without any fees. As for the expense ratio, expect to pay slightly more for a mutual fund — between 0.5% and 1% on average. This fee is between $5 and $10 each year for every $1,000 you invest. However, S&P 500 mutual funds also have a low expense ratio, of around 0.04% or $0.4 for every $1,000 invested.
How much you need to invest
With ETFs, you can start investing with any amount. In the past, you had to invest enough money to buy at least one share of an ETF. But with many brokers offering fractional shares, you can buy a fraction of an ETF share for as little as $1.
Mutual funds come with specific minimums. For example, to invest in some Vanguard mutual funds, you need to invest at least $3,000. Other funds have lower requirements of at least $1,000.
How they’re taxed
ETFs are usually more tax-efficient than mutual funds. Basically, you won’t pay capital gains taxes unless you sell your ETF shares for a profit. If you hold ETFs in an individual account, this can have a huge impact in the long run. But it won’t make a difference with tax-advantaged accounts like IRAs or 401(k).
Mutual funds tend to incur higher capital gains taxes. That’s because they’re actively managed, meaning the asset manager often buys and sells shares. In that case, capital gains taxes could be passed on to everyone who owns shares in the fund, regardless of whether you sold your shares or not. Also, mutual funds that hold stocks and bonds can be taxed differently.
ETFs vs mutual fund: Which one is right for you?
Both assets are similar in what they offer but ETFs are more liquid, meaning you can sell them or buy them whenever you want, they are generally cheaper to buy and more tax-efficient. This makes it a better option for most investors. The only thing going for mutual funds is that many of these funds are actively managed. To be fair, there’s also a growing number of ETFs that are actively managed, so this gap between the two types of funds is narrower these days.
Active vs. passive management
Actively managed funds use a wide range of data from quantitative analysis to fundamental and technical analysis about securities and economic trends. This information allows managers to buy and sell assets to capitalize on price fluctuations and try to beat the broad market indexes. Because these funds are actively managed, they often come with higher expense ratios, i.e. annual fees. On the other hand, passively managed funds are those that use computer programs to trade assets. The goal is for the fund’s price to closely match the moves of a particular index, say S&P 500 or NASDAQ. Because of that, passive funds typically have the lowest expense ratios.
How to invest in ETFs or mutual funds
Choose a stock trading platform. Make sure to check that the platform you choose offers access to either ETFs or mutual funds.
Open your account. You’ll need an ID, bank details and Social Security number.
Confirm your payment details. Fund your account with a bank transfer.
Find the stock you want to buy. Search the platform and buy your ETF or mutual fund.
Compare trading platforms to invest in ETFs or mutual funds
The Finder Score crunches 147 key metrics we collected directly from 18+ brokers and assessed each provider’s performance based on nine different categories, weighing each metric based on the expertise and insights of Finder’s investment experts. We then scored and ranked each provider to determine the best brokerage accounts.
We update our best picks as products change, disappear or emerge in the market. We also regularly review and revise our selections to ensure our best provider lists reflect the most competitive available.
The Finder Score crunches 147 key metrics we collected directly from 18+ brokers and assessed each provider’s performance based on nine different categories, weighing each metric based on the expertise and insights of Finder’s investment experts. We then scored and ranked each provider to determine the best brokerage accounts.
We update our best picks as products change, disappear or emerge in the market. We also regularly review and revise our selections to ensure our best provider lists reflect the most competitive available.
Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money.
Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Frequently asked questions
Vanguard ETFs vs Vanguard mutual Funds
The main difference between Vanguard ETFs and mutual funds is that the latter often has a higher purchase minimum. Some Vanguard mutual funds may require a $3,000 minimum investment, while a Vanguard ETF may require an investment as low as $1.
Are there any tax differences between ETFs vs. mutual funds?
Both ETFs and mutual funds are subject to capital gains tax and taxation of dividend income. However, there are fewer “taxable events” in ETFs than in mutual funds, which makes them more tax-efficient. Here’s why: A mutual fund manager constantly rebalances the fund because of shareholder redemptions or to reallocate assets. This creates capital gains for the shareholders. ETF managers, on the other hand, create or redeem creation units to approximate the ETF investment exposure. Because of that, shareholders are usually not exposed to capital gains.
Are ETFs better than mutual funds?
In general, yes. You can buy or sell ETFs whenever you want during a trading day and from almost any trading platform. It’s more tax-efficient, as well, and the minimum investment requirements are lower compared to mutual funds.
Paid non-client promotion. Finder does not invest money with providers on this page. If a brand is a referral partner, we're paid when you click or tap through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company. Learn more about how we make money.
Finder is not an advisor or brokerage service. Information on this page is for educational purposes only and not a recommendation to invest with any one company, trade specific stocks or fund specific investments. All editorial opinions are our own.
Kliment Dukovski was a personal finance writer at Finder, specializing in investments and cryptocurrency. He's written more than 700 articles to help readers compare the best trading platforms, understand complex investment terms and find the best credit cards for their needs. His expert commentary has been featured in such digital publications as Fox Business, MSN Money and MediaFeed. He’s also well-versed in money transfers, home loans and more — breaking down these topics into simple concepts anyone can understand. In another life, Kliment ghostwrote guides and articles on foreign exchange, stock market trading and cryptocurrencies. See full bio
Kliment's expertise
Kliment has written 38 Finder guides across topics including:
A deep dive into the highlights and limitations of Yieldstreet.
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