ETFs vs Mutual Funds (2024)

Mutual funds can be purchased without trading commissions, but in addition to operating expenses they may carry other fees (for example, sales loads or early redemption fees.

  • What about tax efficiency?

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  • ETFs

    ETFs often generate fewer capital gains for investors since they may have lower turnover and can use the in-kind creation/redemption process to manage the cost basis of their holdings.

    >

  • Mutual Funds

    A sale of securities within a mutual fund may trigger capital gains for shareholders—even for those who may have an unrealized loss on the overall mutual fund investment.

    >

  • Want to learn more?

    How to choose ETFs vs. Mutual Funds

    ETF or mutual fund? Which is right for you?

    That all depends on your goals and the type of investor you are.

    Consider an ETF, if:

    • You trade actively

      Intraday trades, stop orders, limit orders, options, and short selling—all are possible with ETFs, but not with mutual funds.

    • You're tax sensitive

      ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds.

      And, in general, ETFs tend to be more tax efficient than index mutual funds.

    Consider an index mutual fund, if:

    • You invest frequently

      If you make regular deposits—for example, you use dollar-cost averaging—a no-load index mutual fund can be a cost-effective option, and it allows you to fully invest the same dollar amount each time (since mutual funds can be purchased in fractional shares).

    • Similar ETFs are thinly traded

      When you buy or sell ETF shares, the price may be less than the net asset value (or, NAV) of the ETF. This discrepancy (aka: the "bid/ask spread") is often nominal, but for less actively traded ETFs, that might not always be the case.

      By contrast, mutual funds always trade at NAV, without any bid/ask spreads.

    Consider an actively managed mutual fund, if:

    ETFs and mutual funds, at a glance:

    ETFs and mutual funds, at a glance:

    ETFs and mutual funds at a glance

    • >

    • Passive ETFs

      Passive ETFs

      >

    • Active ETFs

      Active ETFs

      >

    • Index Mutual Funds Tooltip

      Index Mutual Funds Tooltip

      >

    • Actively Managed Mutual Funds Tooltip

      Actively Managed Mutual Funds Tooltip

      >

      • Expense Ratio (OER) Tooltip

        >

      • Passive ETFs

        Generally lower than actively managed mutual funds.

        >

      • Active ETFs

        Generally higher than passive ETFs; on par with a mutual fund’s institutional share class.

        >

      • Index Mutual Funds Tooltip

        Generally lower than actively managed mutual funds.

        >

      • Actively Managed Mutual Funds Tooltip

        Generally higher than passively managed, index-tracking funds

        >

        • Performance

          >

        • Passive ETFs

          Performance generally seeks to track a benchmark index

          >

        • Active ETFs

          Performance seeks to outperform a benchmark index.

          >

        • Index Mutual Funds Tooltip

          Performance seeks to track a benchmark index.

          >

        • Actively Managed Mutual Funds Tooltip

          Performance seeks to outperform a benchmark index.

          >

          • Selection of Funds

            >

          • Passive ETFs

            About 2,000

            >

          • Active ETFs

            Over 700 actively managed ETFs and over 45 active semi-transparent ETFs

            >

          • Index Mutual Funds Tooltip

            About 500*

            >

          • Actively Managed Mutual Funds Tooltip

            About 7,000*

            >

            • Trading

              >

            • Passive ETFs

              Intraday

              >

            • Active ETFs

              Intraday

              >

            • Index Mutual Funds Tooltip

              End of Day

              >

            • Actively Managed Mutual Funds Tooltip

              End of Day

              >

              • Price

                >

              • Passive ETFs

                Market price Tooltip

                >

              • Active ETFs

                Market price Tooltip

                >

              • Index Mutual Funds Tooltip

                NAV (Net Asset Value) Tooltip

                >

              • Actively Managed Mutual Funds Tooltip

                NAV (Net Asset Value) Tooltip

                >

                • Potential Tax Efficiency Tooltip

                  >

                • Passive ETFs

                  Most efficient

                  >

                • Active ETFs

                  Efficient

                  >

                • Index Mutual Funds Tooltip

                  Efficient

                  >

                • Actively Managed Mutual Funds Tooltip

                  Less efficient

                  >

                  • Holdings Transparency

                    >

                  • Passive ETFs

                    Holdings generally reported daily

                    >

                  • Active ETFs

                    Active semi-transparent ETFs generally report full holdings on a monthly or quarterly basis, whereas actively managed ETFs will report holdings daily

                    >

                  • Index Mutual Funds Tooltip

                    Holdings generally reported monthly or quarterly

                    >

                  • Actively Managed Mutual Funds Tooltip

                    Holdings generally reported monthly or quarterly

                    >

                *Oldest share classes of funds available in the U.S. as reported by Morningstar Direct, December 2021

                • ETFs at Schwab

                  Learn more

                  Choose from 2,000+ commission-free listed ETFs1, including Schwab's low-cost market cap index ETFs.

                • Ready to start investing?

                  Open your account

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                Need help understanding your ETF options?

                • ETFs vs Mutual Funds (1)

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    ETFs vs Mutual Funds (2024)

    FAQs

    ETFs vs Mutual Funds? ›

    How are ETFs and mutual funds different? How are they managed? While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed.

    Keep Reading
    Are ETFs better than mutual funds? ›

    Both can track indexes, but ETFs tend to be more cost-effective and liquid since they trade on exchanges like shares of stock. Mutual funds can offer active management and greater regulatory oversight at a higher cost and only allow transactions once daily.

    View Details
    What is the downside of ETFs? ›

    For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

    Get More Info
    Is S&P 500 a mutual fund or ETF? ›

    An index fund is a type of mutual fund that tracks a particular market index: the S&P 500, Russell 2000, or MSCI EAFE (hence the name). Because there's no original strategy, not much active management is required and so index funds have a lower cost structure than typical mutual funds.

    Explore More
    Are ETFs good for beginners? ›

    The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.

    Learn More Now
    Why would someone choose an ETF over a mutual fund? ›

    ETFs usually have to disclose their holdings, so investors are rarely left in the dark about what they hold. This transparency can help you react to changes in holdings. Mutual funds typically disclose their holdings less frequently, making it more difficult for investors to gauge precisely what is in their portfolios.

    Show Me More
    Why would I choose an ETF over a mutual fund? ›

    ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.

    Read On
    Why should I not invest in ETFs? ›

    Market risk

    The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

    Find Out More
    Has an ETF ever gone to zero? ›

    Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.

    Read More
    What happens if an ETF goes bust? ›

    Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.

    Learn More Now

    Do you pay taxes on ETFs if you don't sell? ›

    At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

    See Details
    Do ETFs pay dividends? ›

    ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.

    Explore More
    What is the best ETF to invest in? ›

    • Vanguard S&P 500 ETF (VOO)
    • Schwab U.S. Small-Cap ETF (SCHA)
    • iShares Core S&P Mid-Cap ETF (IJH)
    • Invesco QQQ Trust (QQQ)
    • Vanguard High Dividend Yield ETF (VYM)
    • Vanguard Total International Stock ETF (VXUS)
    • Vanguard Total World Stock ETF (VT)
    Apr 24, 2024

    View Details
    How long do you hold ETFs? ›

    For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.

    Discover More
    How many ETFs should I own as a beginner? ›

    Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

    Know More
    Should I just put my money in ETF? ›

    ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.

    Know More
    Which is riskier ETF or mutual fund? ›

    The short answer is that it depends on the specific ETF or mutual fund in question. In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges.

    Learn More Now
    Should I switch from mutual fund to ETF? ›

    If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.

    Keep Reading
    Are ETF good for long term? ›

    ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.

    Tell Me More
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