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ETF vs. mutual fund: Which is right for you?

They both hold baskets of investments, but pricing minimums and trading costs vary.

Exchange-traded funds (ETFs) and mutual funds hold a basket of stocks, bonds, currencies or commodities. Because of that, they can instantly diversify your holdings through a single investment. This can be ideal for retirement and hands-off investors who want to avoid picking stocks or other assets themselves.

ETFs vs. mutual funds: What’s the difference?

Despite the similarities between these two types of funds, there are differences, which can make either of them better-suited for your portfolio.

1. How ETFs and mutual funds are managed

ETFs are typically passive funds, meaning there’s little management over its investments. They automatically track an index — say the S&P 500 or Nasdaq 100 — and the performance closely matches the index. Of course, there are actively managed funds, such as Cathie Wood’s ARK funds where they actively buy and sell stocks to try and outperform the S&P 500.

Mutual funds are known for being actively managed, even though some are passively managed, meaning they track an index like an ETF would. Actively managed mutual funds can cost slightly more to own than ETFs because they require people to make those decisions and execute them.

2. How they’re traded

As the name suggests, exchange-traded funds are traded on exchanges. This means you can buy or sell them as you would any other stock on the market, during a trading session at the current price. This gives you greater flexibility, and you can use almost any broker or trading platform to buy ETFs.

On the other hand, mutual funds are traded and priced at the end of each trading day. Typically, large and established brokerages like Vanguard and Interactive Brokers offer mutual funds, while newer trading platforms like Webull and Robinhood don’t.

3. How much they cost

Because ETFs are traded on an exchange, they often have lower or no fees. Most brokers these days, including SoFi and Robinhood, offer $0 commission on ETF trades.

What’s more, ETFs often have lower expense ratio — i.e. an annual fee to own the fund — of less than 0.4% on average. That’s $4 each year for every $1,000 invested. However, most index ETFs, such as the S&P 500 ETF cost around 0.03% or $0.3 for every $1,000 invested.

Depending on the broker and the mutual fund, it can cost you up to $50 to buy the fund. Some brokers, such as TD Ameritrade, offer a number of mutual funds without any fees.

As for the expense ratio, expect to pay slightly more for a mutual fund – between 0.5% and 1% on average. This is between $5 and $10 fee each year for every $1,000 you invest. However, S&P 500 mutual funds also have a low expense ratio, of around 0.04% or $0.4 for every $1,000 invested.

4. How much you need to invest

With ETFs, you can start investing with any amount. In the past, you had to invest enough money to buy at least one share of an ETF. But with many brokers offering fractional shares, you can buy a fraction of an ETF share with as little as $1.

Mutual funds, however, come with certain minimums. For example, to invest in some Vanguard mutual funds, you need to invest at least $3,000. Other funds have lower requirements of at least $1,000.

5. How they’re taxed

ETFs are usually more tax-efficient than mutual funds. Basically, you won’t pay capital gains taxes unless you sell your ETF shares for a profit. If you hold ETFs in an individual account, this can have a huge impact in the long run. But it won’t make a difference with tax-advantaged accounts like IRAs or 401(k).

Mutual funds, on the other hand, tend to incur higher capital gains taxes. That’s because they’re actively managed, meaning the asset manager often buys and sells shares. In that case, capital gains taxes could be passed on to everyone who owns shares in the fund, regardless whether you sold your shares or not. Also, mutual funds that hold stocks and bonds can be taxed differently.

ETFs vs. mutual funds: Summary

Exchange-traded funds and mutual funds are equally worthy of consideration for any investor — they hold similar selections of investments and can help diversify your portfolio. But there are some general differences to take into account before you buy.

Exchange-traded fundsMutual funds
Selection of assetsStocks, bonds, currencies and commoditiesStocks, bonds, currencies and commodities
Minimum investmentNo minimumTypically $1,000
Management typeMost funds are passiveMost funds are active
Expense ratios0.4% on average0.5% to 1%
Trading commissions$0$19.99 to $49.99 per fund
TaxesMore tax-efficientLess tax-efficient

Compare trading platforms

To trade funds you’ll need a brokerage account. Review your platform options by features, fees and investor feedback to find the account best suited to your needs. If you want to invest in ETFs by making frequent purchases, look for a brokerage with a $0 commission on ETFs.

Name Product Asset types Option trade fee Annual fee Signup bonus
M1 Finance
Stocks
$0
0%
Free 1-year trial of M1 Plus
when you sign up for M1 Finance
Invest in your favorite stocks or in curated portfolios with automatic rebalancing.
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 most equities.
TradeStation
Stocks, Bonds, Options, Mutual funds, ETFs, Cryptocurrency
$0 + $0.50/contract
$0 per month
$10 of crypto
Open an account with access to crypto
A platform built for all kinds of traders and all styles of trading
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.
Stash Invest
Stocks, ETFs
$0
$1 per month
$5
Add at least $5 to your Invest account
Stash is more than an investment app. You’ll have access to tools that can help you become a confident investor.
Public
Stocks, ETFs, Cryptocurrency
N/A
$0 per month
Download and sign up with Public.com; approved accounts receive a free stock slice worth up to $300, selected from 9 popular stocks.
Open an account
Commission-free trading in stocks and ETFs with a social networking twist.
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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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