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ETFs vs. index mutual funds

Both offer diversified baskets of investments, but trading fees and minimums vary.

Exchange-traded funds (ETFs) and index mutual funds share plenty in common, but they’re far from interchangeable. Before you invest in either of these funds, know how to recognize the key differences that separate them so you can make the best pick for your portfolio.

Quick look: ETFs vs. index mutual funds

How do exchange-traded funds and index mutual funds compare? Here’s our 30-second take.

ETFsIndex mutual funds
DefinitionA fund that tracks a collection of investments and actively trades on an exchange.A passively managed mutual fund that tracks a market index.
Similarities
  • Diversified investment
  • Pooled basket of assets
  • Passively managed
  • Lower expense ratios
  • Diversified investment
  • Pooled basket of assets
  • Passively managed
  • Lower expense ratios
Differences
  • Price fluctuates throughout the day and can be purchased any time during market hours
  • Lower minimums
  • Typically no commissions or trading fees
  • Price set and can only be purchased at the end of the trading day
  • Higher minimums
  • Investors may encounter commissions and trading fees
Best forShort- or long-term tradesBuy-and-hold investors

What are ETFs?

An exchange-traded fund is a fund that trades on a stock exchange. ETFs have their own ticker symbols and can be bought and sold throughout the trading day — much like a stock. But unlike stocks, these funds offer investors the opportunity to buy into a diversified basket of investments with a single purchase.

The average exchange-traded fund may invest in any number of different asset classes, including stocks, bonds, foreign currencies, commodities and precious metals. ETFs may also track entire sectors or market indexes, like the Standard & Poor’s 500 (S&P 500), the Dow Jones Industrial Average or the Nasdaq Composite.

What are index mutual funds?

An index mutual fund is a mutual fund that tracks an index. These passively managed funds aim to mimic the returns of the indexes they follow. They aren’t designed to beat the market: they bank on the premise that you can’t outmaneuver the market and instead try to match overall market returns.

Traditional mutual funds vs. index mutual funds: What’s the difference?

The biggest difference between index funds and traditional mutual funds is how they’re managed.

Traditional mutual funds are actively managed:

  • A management team of investment advisers selects the fund’s investments.
  • This team actively monitors the fund.
  • Investments are moved in and out of the fund as needed.

Because they require more attention and supervision, actively managed funds usually come with heftier fees. You’re betting that those professional managers can deliver higher returns than the market or an index.

Index funds are passively managed: the stocks they track are predetermined by the index they follow, so they don’t require the ongoing observation of a management team. As a result, index mutual funds typically carry lower expense ratios and fees.

5 similarities between ETFs and index mutual funds

ETFs and index mutual funds have plenty in common:

  1. Pooled investments. Unlike stocks, which represent a stake of ownership in a single company, ETFs and index mutual funds comprise baskets of investments.
  2. Diversified. Because they invest in multiple assets, ETFs and index mutual funds are a naturally diversified investment.
  3. Passively managed. Both exchange-traded funds and index funds aim to mimic the performance of an index or group of assets and don’t require active management.
  4. Low cost. These funds tend to have lower expense ratios than actively managed funds.
  5. Long-term gains. Both of these funds are suitable for buy-and-hold investors seeking long-term profits.

4 differences between ETFs and index mutual funds

Despite their similarities, exchange-traded funds and index mutual funds are unique investment vehicles with distinct features.

1. Trading fees are higher for mutual funds

Expense ratios — the management fee you pay for owning the fund — are typically low for both ETFs and index funds. But you may encounter different fees when purchasing or selling these two types of funds. Most ETFs are available commission-free, so you can move these funds in and out of your account without any penalties or fees.

Mutual funds, on the other hand, carry numerous trading fees. The two fees you’re most likely to encounter are:

    • Load fees — Typically 3.75% to 5.75%.

A sales charge, also called a load fee, is a fee that amounts to a percentage of the fund charged when purchasing the fund. Not all mutual funds charge load fees.

    • Commissions — Typically $19.99 to $49.99.

Some brokers let you trade mutual funds commission-free, but most charge commissions.

2. Minimum investments are higher for mutual funds

To purchase an ETF, you need to have enough to cover the cost of a single share — and sometimes not even that much, if your broker offers fractional shares.

But some mutual funds require a minimum investment, depending on the broker. Vanguard, for instance, imposes a $3,000 minimum on its index mutual funds.

3. Exchange-traded funds trade more frequently

Exchange-traded funds trade on an exchange, much like stocks. Their price fluctuates throughout the trading day, and they can be bought and sold any time during market hours. This makes ETFs a practical fit for active traders.

Mutual funds are only priced at the end of the trading day when they’re bought and sold, making them better suited to buy-and-hold investors.

4. Exchange-traded funds are more tax-optimized

Exchange-traded funds tend to be the more tax-optimized investment — although index mutual funds have a distinct leg up over actively managed mutual funds.

When you sell an ETF, you sell your shares directly to another investor and must pay capital gains tax on the sale. But when you sell an index fund, you must redeem it from the fund manager. Any net gain generated from the sale of fund securities is passed on to each investor in the fund.

3 top ETFs and index mutual funds compared

We pulled the data for three of the biggest index ETFs and comparable mutual funds, so you can see how the numbers stack up.

Model index1-year return5-year returnMinimum investmentExpense ratio
SPDR S&P 500 ETF Trust (SPY)S&P 50034.12%18.21%$00.095%
Fidelity 500 Index (FXAIX)S&P 50034.18%18.33%$00.015%
iShares Russell 3000 ETF IWVRussell 300036.35%18.07%$00.200%
iShares Total US Stock Market Idx Inv A (BASMX)Russell 300036.21%117.90%$1,0000.310%
Invesco QQQ Trust ETF (QQQ)Nasdaq 10037.33%28.17%$00.200%
USAA NASDAQ-100 Index USNQXNasdaq 10036.95%27.85%$3,0000.440%

Data from Morningstar. Five-year returns are annualized.

Morningstar’s analysts complement the Fidelity 500 Index for its unusually low costs. For the other categories here, you’ll notice that the mutual funds carry higher expense ratios than the ETFs and offer lower returns. Two of the mutual funds also impose minimum investment requirements — while the ETFs let you invest with any amount.

Which is right for me?

The best fit for your portfolio depends on a number of factors, including how frequently you prefer to make trades and how much you have to invest.

Choose an ETF if…

  • You’re an active trader
  • You have less to invest and want the lowest possible fees
  • You prefer to execute trades right away

Choose an index mutual fund if…

  • You’re a buy-and-hold investor
  • You have more to invest
  • You don’t mind delaying your trades until the end of the trading day

Compare investment platforms

To invest in mutual funds or ETFs, you’ll need a brokerage account. Explore your options across numerous trading platforms, paying special attention to trading fees and what types of assets are available — not all platforms offer access to mutual funds.

Name Product Asset types Option trade fee Annual fee Signup bonus
Robinhood
Robinhood
Stocks, Options, ETFs, Cryptocurrency
$0
0%
Free stock (chosen randomly with a value anywhere between $2.50 and $200)
Sign up using the "go to site" link
Make unlimited commission-free trades in stocks, funds, and options with Robinhood Financial.
J.P. Morgan Self-Directed Investing
Stocks, Bonds, Options, Mutual funds, ETFs
$0 + $0.65/contract
0%
N/A
INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Vanguard Personal Advisor
Stocks, Options, Mutual funds, ETFs
N/A
$20 per year
N/A
Financial advice powered by relationships, not commissions.
TradeStation
Stocks, Bonds, Options, Mutual funds, ETFs, Cryptocurrency
$0 + $0.50/contract
$0 per month
$50
Deposit qualifying assets of $5,000+
A platform built for all kinds of traders and all styles of trading
Sofi Invest
Stocks, ETFs, Cryptocurrency
N/A
0%
Get one free stock worth up to $1,000
Open an account
A free way to invest in stocks, ETFs and crypto.
Moomoo
Stocks
$0
$0 per year
Get a free stock valued up to $350
Open your Futu brokerage account via Moomoo
Trade stocks on the US, Hong Kong, Shanghai and Shenzhen markets.
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Compare up to 4 providers

*Signup bonus information updated weekly.

Disclaimer: The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.

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