ETFs vs Mutual Funds: Which Should You Choose?
ETFs and mutual funds both let you own many investments in a single purchase. Here's how they work, the real differences in trading, costs, minimums and taxes, and how to decide which suits you.
By Pond.com editors Updated 2 min read
Quick answer
- Both ETFs and mutual funds pool money to buy many stocks, bonds or both in one investment.
- ETFs trade throughout the day like a stock; mutual funds are bought and sold once a day after the market closes.
- ETFs often have no minimum beyond one share, and many brokerages offer fractional shares.
- In taxable accounts, ETFs are usually more tax-efficient.
- What's inside matters more than the wrapper; a low-cost index fund is a good choice either way.
ETFs and mutual funds are the two most common ways to invest in lots of companies at once. They're similar in many ways, and the differences matter less than people think. Here's what really sets them apart.
This article is general information, not investment advice.
What they have in common
Both pool money from many investors to buy a collection of stocks, bonds or both. One purchase gives you a slice of hundreds or thousands of investments, which spreads your risk. Both can be index funds, which track a market index at low cost, or actively managed, where a manager picks investments for a higher fee.
The differences
| ETFs | Mutual funds | |
|---|---|---|
| Trading | Throughout the day, at changing prices | Once a day, at the closing price |
| Minimum | One share, or less with fractional shares | Often $1,000 to $3,000 for the first purchase, sometimes none |
| Automatic investing | Depends on the brokerage | Easy, in exact dollar amounts |
| Fees | Often very low | Low for index funds; higher for active funds |
| Taxes in a regular account | Usually more tax-efficient | Can pass on capital gains taxes |
| Where you'll see them | Any brokerage | Brokerages and most 401(k) plans |
How to choose
- In a 401(k): you'll usually choose from mutual funds. Pick low-cost index funds or a target-date fund.
- In an IRA or brokerage account: either works. ETFs suit people who want low costs and low minimums; mutual funds suit people who want to invest a fixed amount automatically.
- In a regular taxable account: ETFs often save on taxes.
What matters most
The type of wrapper is less important than what's inside:
- Low costs. Check the expense ratio. Broad index funds often charge under 0.1% a year.
- Broad spread. Funds that cover the whole market are less risky than narrow, themed funds.
- No sales charges. Avoid funds with "loads" or sales commissions.
Common questions
Not exactly. An index fund is any fund that tracks a market index, and it can be an ETF or a mutual fund. Most ETFs are index funds, but some are actively managed or focus on narrow themes.
Neither is always better. ETFs are often cheaper, flexible and tax-efficient. Mutual funds make it easy to invest exact dollar amounts automatically and are common in 401(k) plans. A low-cost, broad index fund is a sensible choice in either form.
It's the yearly fee a fund charges, shown as a percentage of your investment. An expense ratio of 0.05% costs $5 a year for every $10,000 invested. Lower is better, since fees come straight out of your returns.