Daily Capital

ETF vs. Mutual Fund: What’s the Difference?

When constructing an investment portfolio, you’ll probably include a variety of stocks and bonds among the securities you purchase. Stocks and bonds can be purchased individually or as part of a bundle of securities known as a mutual fund or an exchange traded fund (ETF).

Buying securities this way offers several potential advantages to investors — one of the biggest being instant diversification because mutual funds and ETFs contain not just one security, but many different individual securities. Funds are also run by professional portfolio managers, so investors have the benefit of expert management. But what is the difference between these two investment vehicles? They are often conflated, so we break down the similarities and differences.

The Tool To Beat

What are ETFs and Mutual Funds?

Some people wonder whether mutual funds and ETFs are just different names for the same type of investing, or if they are different altogether. While there are similarities, they aren’t the same thing.

First, the similarities: Both mutual funds and ETFs consist of a basket of many different individual securities pooled together. So when you buy shares in a fund, you are effectively buying the shares or investing in the debt of hundreds, or even thousands, of different companies.

What is the Difference Between an ETF and a Mutual Fund?

  1. Like individual stocks, ETFs are listed on the major stock exchanges. Therefore, you must have a brokerage account in order to buy and sell ETFs. Conversely, shares of mutual funds are traded directly with the fund company, so no brokerage account is necessary in order to buy and sell. You can simply place trade orders with the fund company or your financial advisor.With ETFs, there is a bid price and an ask price — the price paid is usually somewhere between these. For example, suppose you want to invest $5,000 in an ETF at a final price of $45 a share. You’d need to place an order for 111 shares (111 x $45 = $4,995).
  2.  

  3. ETFs are traded throughout the day, just like stocks, with their prices fluctuating all day long. As a result, they generally offer more trading flexibility as well as greater transparency.Mutual funds, on the other hand, are priced after the markets have closed at the end of the day when the fund’s net asset value (NAV) is calculated. So if you wanted to invest $5,000 in a mutual fund priced at $45 a share, you’d simply place a $5,000 order and receive approximately 111 shares at the end of the trading day.
  4.  

  5. ETFs are index funds that are passively managed. While some mutual funds are also passively managed index funds, others are actively managed. As a result, ETFs usually feature lower expenses than mutual funds, which can result in higher after-tax returns. According to the Investment Company Institute (ICI), the average expense ratio of index ETFs is 0.21% while the average expense ratio of actively managed mutual funds is 0.78%.ETFs also tend to be more tax-efficient than mutual funds due to their low turnover, which minimizes taxable capital gains distributions. ETF securities don’t have to be sold in order to meet redemption requests from investors. This isn’t the case with mutual funds, where these redemptions may generate taxable gains.

Our Take

So which type of investment would be best for you — a mutual fund or an ETF? It depends on several different factors. But we generally advise against mutual funds due to some performance issues, unfavorable treatment of tax liabilities, and high costs.

Additionally, mutual funds are actively managed, and active managers rarely beat their benchmark over the long-term.

However, while we tend to recommend against mutual funds, in a diversified portfolio, there may be a place for both mutual funds and ETFs. You should speak with your financial advisor about which type of investment is better suited to your investment goals and objectives.

Personal Capital’s dedicated financial advisors would be happy to talk through whether ETFs or mutual funds might work for your specific situation. You can schedule a free consultation after signing up for our dashboard.

Sign Up Now


Disclaimer: The information on this website is for informational purposes only and does not constitute a complete description of our investment services or performance. No part of this site nor the links contained therein is a solicitation or offer to sell securities or investment advisory services, except where applicable in states where we are registered, or where an exemption or exclusion from such registration exists. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data’s currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Amin Dabit, CFP®
Amin Dabit is the Director of Advisor Services with Personal Capital. Along with the EVP of Advisory, Amin helps lead Personal Capital’s financial planning experience and advice. Amin brings over a dozen years of experience in private wealth management and financial planning. Amin works with the advisory team to identify and establish strategies for reaching clients' financial goals by providing comprehensive, customized financial advice designed to improve their financial lives.

You can take control of your money. We’re here to help.

Sign up for our Newsletter to get tips from our financial experts.

Must be a valid email address
Icon Close

To learn what personal information Personal Capital collects, please see our privacy policy for details.