ETFs vs. index mutual funds

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.

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.

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.

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.

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.

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Finder Score	Available asset types	Stock trade fee	Minimum deposit	Cash sweep APY	bullet point infobox
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Finder score 9 Excellent SoFi Active Invest	Finder score 9 Excellent	Stocks, Options, Mutual funds, ETFs, Alternatives	$0	$0	0.01%	Get up to $1,000 in stock when you open and fund a new account. T&Cs apply.	Trade stocks, ETFs, and options with zero commissions, invest in IPOs or automate your portfolio, with exclusive perks available through SoFi Plus.	Important information INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE Other fees, such as exchange fees, may apply. Please view our fee disclosure to view a full listing of fees. Investing in alternative investments and/or strategies may not be suitable for all investors and involves unique risks, including the risk of loss. An investor should consider their individual circumstances and any investment information, such as a prospectus, prior to investing. Interval Funds are illiquid instruments, the ability to trade on your timeline may be restricted. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA (www.finra.org) /SIPC(www.sipc.org). There are limitations with fractional shares to consider before investing. During market hours fractional share orders are transmitted immediately in the order received. There may be system delays from receipt of your order until execution and market conditions may adversely impact execution prices. Outside of market hours orders are received on a not held basis and will be aggregated for each security then executed in the morning trade window of the next business day at market open. Share will be delivered at an average price received for executing the securities through a single batched order. Fractional shares may not be transferred to another firm. Fractional shares will be sold when a transfer or closure request is initiated. Please consider that selling securities is a taxable event. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire investment Before trading options please review the Characteristics and Risks of Standardized Options Advisory services are offered by SoFi Wealth LLC, an SEC-registered investment adviser. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see https://www.sofi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information SoFi Plus members can schedule an unlimited number of appointments with a financial planner during periods in which the SoFi Plus member meets the eligibility criteria set forth in section 10(a) of the SoFi Plus Terms and Conditions. SoFi members who are not members of SoFi Plus can schedule one (1) appointment with a financial planner. The ability to schedule appointments is subject to financial planner availability. SoFi reserves the right to change or terminate this benefit at any time with or without notice. Advisory services are offered by SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease Robo Advisor: Automated investing is offered through SoFi Wealth LLC, an SEC-registered investment adviser. 0.25% fee is based on your account value. The wrap program fee may cost more or less than purchasing brokerage, custodial, and record keeping services separately. Terms and conditions apply*. For 401k rollovers, existing SoFi IRA members must complete 401k rollovers via this link For SoFi members without a SoFi IRA, a SoFi IRA must first be opened, and 401k rollover must be completed utilizing Capitalize via this link. SoFi and Capitalize will charge no additional fees to process a 401(k) rollover to a SoFi IRA. SoFi is not liable for any costs incurred from the existing 401k provider for rollover. Please check with your 401k provider for any fees or costs associated with the rollover. For IRA contributions, only deposits made via ACH and cash transfer from SoFi Bank accounts are eligible for the match. Click here for the 1% Match terms and conditions.	Go to site More info	loading
Finder score 9.4 Excellent Webull	Finder score 9.4 Excellent	Stocks, Bonds, Options, ETFs, Futures, Money market funds	$0	$0	3.60%	Deposit or transfer $100,000+ to earn a 4% Match Bonus, or $2,000+ to earn a 3% Match Bonus. Plus: Get a $100 transfer fee reimbursement on your first brokerage transfer of $2,000 or more. T&Cs apply.	Trade stocks, ETFs and equity options commission-free, with access to futures, advanced charting tools, a robo-advisor and event trading powered by Kalshi.	Go to site More info	loading
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Finder score 8.2 Great eToro	Finder score 8.2 Great	Stocks, Options, ETFs, Cryptocurrency, Investments	$0	$0	3.75%	No commission stock, ETF and options trades, with 3.9% interest on your options account balance and no options contract fees. See full disclosure.	Important information eToro securities trading offered by eToro USA Securities, Inc. (‘the BD”), member of FINRA and SIPC. Investing involves risk, and content is provided for educational purposes only, does not imply a recommendation, and is not a guarantee of future performance. Finder is not an affiliate and may be compensated if you access certain products or services offered by the BD.	Go to site More info	loading
Finder score 8 Great Acorns	Finder score 8 Great	Stocks, ETFs	$0	$0	N/A	Get a $20 bonus when you set up an account and make your first recurring investment (min. $5). T&Cs apply.	Automate investing with recurring contributions starting at $5 and invest spare change from everyday purchases.	Go to site More info	loading
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Finder score 9 Excellent Wealthfront	Finder score 9 Excellent	Stocks, ETFs, High-yield cash account	$0	$500	3.75%	Get a $50 bonus when you sign up and fund a taxable automated investing account with at least $500. T&Cs apply.	Automate your stock and bond portfolio or trade individual stocks for as little as $1 apiece. Plus, earn 3.50% APY on your cash.	Go to site More info	loading
Finder score 7.2 Great J.P. Morgan Personal Advisors	Finder score 7.2 Great	Mutual funds, ETFs	$0	$25,000	N/A	Financial planning, advice and portfolio management. T&Cs apply.	Get ongoing access to an advisory team with personalized financial planning and expert-built portfolios. Provider terms & conditions apply	Important information INVESTMENT PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE.	More info	loading
Finder score 8.2 Great M1 Finance	Finder score 8.2 Great	Stocks, ETFs, Cryptocurrency	$0	$100	4.00%	Build a custom portfolio of stocks and ETFs with automatic rebalancing. Plus, earn 4.00% APY with a high-yield cash account.	Important information M1 Finance, LLC does not charge commission, trading, or management fees for self-directed brokerage accounts. You may still be charged other fees such as M1’s platform fee, regulatory fees, account closure fees, or ADR fees. For a complete list of fees M1 may charge visit M1 Fee Schedule. M1 is not a bank. M1 Spend is a wholly-owned operating subsidiary of M1 Holdings Inc.. M1 High –Yield Savings Accounts are furnished by B2 Bank, NA, Member FDIC. Obtaining stated APY (annual percentage yield) with the M1 High-Yield Savings Account does not require a minimum account balance. Stated APY is accrued on account balance. APY is solely determined by M1 Spend LLC and its partner banks, and will include account fees that will reduce earnings. Rates are subject to change without notice. M1 High-Yield Savings Account is a separate offering from, and not linked to, the M1 High-Yield Cash Account offered by M1 Finance, LLC. M1 is not a bank.	More info	loading

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Shannon Terrell

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Shannon Terrell is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in personal finance. Her writing and analysis on investing and banking has been featured in Bloomberg, Global News, Yahoo Finance, GoBankingRates and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga. See full bio

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