| How ETFs and mutual funds are managed: active or passive | ETFs are typically passive funds, meaning there’s little management over their investments. They automatically track an index — like the S&P 500 or Nasdaq 100 — and the performance closely matches the index. 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 as 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. |
| How they’re traded | ETFs 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. | Mutual funds are traded and priced at the end of each trading day. Most full-service brokerages — including Vanguard and Interactive Brokers — offer mutual funds. It’s mainly newer, app-first trading platforms like Webull and Robinhood that don’t. |
| How much they cost | ETFs often have low or no buy fees. Most brokers these days, including SoFi® and Robinhood, offer $0 commission on ETF trades. Index equity ETFs carry an average expense ratio — an annual fee to own the fund — of about 0.14%, according to Investment Company Institute data.(1) That’s roughly $1.40 each year for every $1,000 invested. Some of the cheapest S&P 500 ETFs charge as little as 0.03%, or $0.30 for every $1,000 invested. | Some mutual funds charge a sales load of up to $50 or more to buy in, though many brokers now offer no-transaction-fee mutual funds as well. Equity mutual funds carry an average expense ratio of about 0.40%, according to the same Investment Company Institute data.(1) That’s roughly $4 each year for every $1,000 invested. Index mutual funds are far cheaper — Vanguard’s S&P 500 index mutual fund, for example, charges just 0.04%, or $0.40 for every $1,000 invested. |
| 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 for as little as $1. | Mutual funds come with specific minimums. Most Vanguard mutual funds require at least $3,000, though Vanguard’s Target Retirement and STAR® funds only require $1,000.(2) |
| 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 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 of whether you sold your shares or not. Also, mutual funds that hold stocks and bonds can be taxed differently. |
