ETFs vs. mutual funds: Which investment is right for you?

• Both ETFs and mutual funds help you diversify by purchasing a wide range of investments in a single trade rather than picking individual stocks or bonds.
• ETFs often come with lower fees, greater transparency, and all-day trading flexibility, while mutual funds trade at just one price daily.
• The structure of ETFs typically makes them more tax efficient than mutual funds.

Exchange traded funds (ETFs) and mutual funds are two of the most popular investment vehicles used when building a portfolio. But which should you choose when building your investment strategy?

What do ETFs and mutual funds have in common?

While ETFs and mutual funds differ in how they’re structured and traded, they share a common foundation that offers several key benefits:

Diversification

One of the most common investing principles is diversification, or spreading your money across a range of holdings rather than relying on a single investment. And that’s true for ETFs and mutual funds. Both use pooled money to invest across dozens, hundreds—sometimes thousands—of individual stocks, bonds, and other investments. That way, if one or more investments drop, other investments can pick up the slack. The upshot? A smoother ride for you as an investor.

Professional management

ETFs and mutual funds are managed by investment professionals. They buy and sell investments to make sure the fund follows the strategy found in its legal document, the prospectus.

Many ETFs, and some mutual funds, are designed to track a market index like the S&P 500®. Portfolio managers for these funds seek to follow their benchmark. Then there are actively managed funds. These ETFs and mutual funds rely on the research and experience of the portfolio managers as they seek to beat the market, reduce volatility, or achieve another investment goal.

A variety of investment options

With over 14,000+ ETFs available globally¹—in addition to a significant number of mutual funds—there are funds for just about every investment goal. Some of the more popular strategies seek to:

• Track an index
• Generate income
• Reduce volatility
• Focus on a specific industry
• Access global companies
• Outpace inflation
• Seek undervalued companies
• Protect existing investments
• Maximize growth potential
• Adjust risk based on age

The diversification, professional management, and wide variety of investment options offered by ETFs and mutual funds make either option a solid choice for building your portfolio.

Where do ETFs and mutual funds differ?

While ETFs and mutual funds share many similarities, there are a few important differences in how they’re structured, priced, and managed. Let’s look at the key ways they differ so you can decide which may better fit your needs.

Transparency

Let’s face it—it’s important to understand what you own so you can evaluate risks and make sure a fund aligns with your goals.

Both mutual funds and ETFs are required to regularly share what’s in their portfolios. But how frequently they disclose their holdings differs. Most ETFs share their holdings daily, allowing an up-to-date, fully transparent view of your investments. Mutual funds release a list of holdings on a monthly or quarterly basis, so the information may not always be current.

Cost efficiency

All funds come with costs. Most charge an expense ratio, or the percentage of your investment that covers management and operating expenses.

On average, ETFs historically have had lower expense ratios than mutual funds. One reason for this: many ETFs track indexes and tend to have lower portfolio turnover, which can help reduce operating costs.

But expense ratios don’t tell the whole story. It’s important to consider the total cost of ownership (TCO), which includes:

• Expense ratios
• Trading costs (like brokerage commissions or bid-ask spreads)
• Holding costs over time

ETFs may help lower total costs in several ways. Their structure allows trading on an exchange, often with tight spreads and deep liquidity, and their typically lower turnover can reduce ongoing costs.

That said, ETFs aren’t free. If you trade frequently, commissions and other transaction costs can add up and offset some savings.

As always, you can find detailed information about fees and expenses in a fund’s prospectus.

Trading liquidity

Liquidity means an investment that can be quickly and easily turned into cash. Both ETFs and mutual funds are generally considered liquid because you can buy and sell them daily.

But ETFs win the liquidity battle. That’s because they trade like stocks on an exchange, with prices changing throughout the day based on supply and demand. You can buy and sell an ETF any time the market is open. Mutual funds, on the other hand, set their price and execute all trades once a day after the market closes.

Tax efficiency

When your investments increase in value, you may owe taxes on those gains—either when you sell your shares or when a fund distributes capital gains to shareholders.

Both ETFs and mutual funds are required to distribute realized capital gains to investors. However, how those gains are generated—and how often they’re distributed—can differ. ETFs are generally more tax efficient for two key reasons:

• Lower turnover: Many ETFs track indexes and may trade less frequently, which can result in fewer realized capital gains.

• In-kind creation and redemption: ETFs can transfer securities in and out of the fund without selling them on the open market. This helps reduce the likelihood of generating taxable gains inside the fund.

With mutual funds, when investors redeem shares, the fund manager may need to sell securities to raise cash. Those sales can create capital gains that are distributed to all shareholders.

As a result, ETF investors typically owe capital gains taxes primarily when they sell their shares, while mutual fund investors may receive taxable distributions even if they haven’t sold.

Which type of investment is right for you?

Sometimes the best answer is both. ETFs and mutual funds each give you diversification, professional management, and a wide range of investment options.

ETFs combine broad market access with lower fees, the flexibility to trade throughout the day, and built-in tax efficiency. And with no minimum investment amount, they’re often more accessible to investors who want to invest in smaller amounts (say $100). That makes them a practical, cost-effective way to build and manage your portfolio as you plan for your investment goals.