ETFs and mutual funds are both popular investment vehicles that pool money from many investors. But they have important differences that can impact your returns.
How They Work
Mutual Funds are priced once daily at market close. You buy and sell at the NAV (Net Asset Value). Many are actively managed by professional fund managers.
ETFs (Exchange-Traded Funds) trade on stock exchanges like individual stocks. Their prices fluctuate throughout the day. Most track an index passively.
Cost Comparison
| Factor | ETFs | Mutual Funds |
|---|---|---|
| Average Expense Ratio | 0.03% - 0.50% | 0.50% - 1.50% |
| Trading Commissions | Usually $0 | Often $0 |
| Minimum Investment | Price of 1 share | $500 - $3,000 |
Tax Efficiency
ETFs are generally more tax-efficient due to their "in-kind" creation and redemption mechanism. Mutual funds may trigger capital gains distributions even if you didn't sell.
Who Should Choose What?
Choose ETFs if you: Want lower costs, tax efficiency, and intraday trading flexibility.
Choose Mutual Funds if you: Want automatic investing, professional active management, or specific fund families.
The Bottom Line
For most beginners, a low-cost index ETF portfolio is the best starting point. As your knowledge grows, you can add actively managed funds for specific strategies.