Is it better to invest in ETF or mutual fund?

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs . If you worry about the impact of commissions and spreads, go with mutual funds.

Why a mutual fund over an ETF?

Unlike ETFs, mutual funds can offer more specific strategies as well as blends of strategies. Mutual funds offer the same type of indexed investing options as ETFs but also an array of actively and passively managed options that can be fine-tuned to cater to an investor's needs.

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.

Is S&P 500 a mutual fund or ETF?

Index investing pioneer Vanguard's S&P 500 Index Fund was the first index mutual fund for individual investors.

Which is riskier ETF or mutual fund?

Both are less risky than investing in individual stocks & bonds . ETFs and mutual funds both come with built-in diversification. One fund could include tens, hundreds, or even thousands of individual stocks or bonds in a single fund. So if 1 stock or bond is doing poorly, there's a chance that another is doing well.

Which is safer ETF or mutual fund?

In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns.

Should I switch my mutual funds to ETFs?

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.

Should I put all my money into ETF?

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate . If you want to be highly conservative, don't use these at all.

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.

Has an ETF ever gone to zero?

Theoretically, for exotic ETFs, yes — but as a practical matter highly unlikely . And for broad market ETFs that track something like the S&P 500 Index the probability of going to zero is, well, about zero. Every stock in the index would have to go to zero.

What happens if an ETF goes bust?

ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. 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 .

Why I don't invest in ETFs?

ETFs are most often linked to a benchmarking index, meaning that they are often not designed to outperform that index . Investors looking for this type of outperformance (which also, of course, carries added risks) should perhaps look to other opportunities.

Do you pay taxes on ETF 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 .

Do ETFs outperform mutual funds?

ETFs often generate fewer capital gains for investors than mutual funds . This is partly because so many of them are passively managed and don't change their holdings that often.

ETFs vs Mutual Funds (2024)

Table of Contents

Want to learn more? ETF or mutual fund? Which is right for you? Consider an ETF, if: Consider an index mutual fund, if: Consider an actively managed mutual fund, if: ETFs and mutual funds, at a glance: ETFs and mutual funds, at a glance: Want to learn more about ETFs and Mutual Funds? Need help understanding your ETF options? FAQs

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?

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:

You're looking for a fund that could potentially beat the market

People invest in actively managed mutual funds in hopes they'll surpass their benchmarks.
See Also
What Are ETF Risks? - Fidelity ETF Drawbacks: The Downsides of Investing in ETFs | Titan Do You Need a Demat Account to Invest in Mutual Funds | 5paisa | 5paisa ETF | Exchange Traded Mutual Funds | NAV | Best ETF Funds
Also, actively managed funds acquired as part of a specific strategy may complement index funds in a portfolio, and help to reduce downside risk and mitigate market volatility.
You're investing in a less efficient market

Some markets are "highly efficient"—which means they’re so popular, there isn't much opportunity to add any real value via active portfolio management.
But in less efficient markets–like high-yield bondsoremerging markets–there may be greater opportunities through active portfolio management.

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.
    >
    See Also
    Learn how to buy an ETF | Vanguard
  - 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
    
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ETFs vs Mutual Funds (2024)

Want to learn more?

ETF or mutual fund? Which is right for you?

Consider an ETF, if:

Consider an index mutual fund, if:

Consider an actively managed mutual fund, if:

ETFs and mutual funds, at a glance:

ETFs and mutual funds, at a glance:

Need help understanding your ETF options?

FAQs

ETFs vs Mutual Funds? ›

Has an ETF ever gone to zero? ›