What is the Difference Between ETF and Mutual Fund?

05/31/2025 • Felipe Moraes

ETFs (Exchange-Traded Funds) and Mutual Funds are both pooled investment funds that offer investors a stake in a diversified portfolio of assets. They have some similarities but also key differences:

Similarities:

  1. Diversification: Both ETFs and Mutual Funds provide built-in diversification by including a wide variety of stocks or bonds in a single fund.
  2. Access to various asset classes and markets: Both types of funds give investors access to a wide range of U.S. and international stocks and bonds, allowing them to invest broadly or narrowly depending on their personal goals and investing style.
  3. Professional management: ETFs and Mutual Funds are managed by experts who choose and monitor the stocks or bonds the funds invest in.

Differences:

  1. Trading: ETFs can be bought and sold like stocks throughout the trading day, while Mutual Funds can only be purchased at the end of each trading day based on a calculated price.
  2. Management: While most ETFs are passive investments pegged to the performance of a particular index, most Mutual Funds are actively managed by fund managers. However, there are also actively-managed ETFs.
  3. Tax efficiency: ETFs tend to be more tax-efficient than Mutual Funds, as they may generate fewer capital gains for investors.
  4. Fees and expenses: Actively-managed Mutual Funds tend to have higher fees and expense ratios than ETFs due to the higher operating costs involved in active management.
  5. Liquidity: ETF shareholders can trade throughout the day, just as with stocks, while Mutual Fund investors can usually redeem their shares with ease on a daily basis.

In summary, ETFs are more suitable for investors who prefer intra-day trading, tax efficiency, and lower fees, while Mutual Funds are better for those who prefer active management and the ability to redeem shares daily.

Comparative Table: ETF vs Mutual Fund

Here is a table comparing the differences between ETFs and Mutual Funds:

Feature ETFs Mutual Funds
Trading Bought and sold like stocks, traded intra-day Can only be purchased at the end of each trading day based on a calculated price
Management Mostly passively managed, tracking market indices or specific sector indices Mostly actively managed by fund managers
Tax Efficiency Generally more tax-efficient due to the way shares are created and redeemed Generally less tax-efficient compared to ETFs
Diversification Provides an easy, cost-efficient way to diversify a portfolio Provides an easy, cost-efficient way to diversify a portfolio
Purchase and Sale Can be traded using intraday trades, stop orders, limit orders, options, and short selling Cannot be traded using intraday trades, stop orders, limit orders, options, and short selling
Availability Can be purchased and sold throughout the trading day at market-determined prices Can only be purchased at the end of each trading day based on a calculated price
Minimum Initial Purchase No minimum initial purchase requirement May have minimum initial purchase requirements
Trading on Stock Exchanges Traded on stock exchanges like stocks Not traded on stock exchanges

Both ETFs and Mutual Funds have similarities, such as providing diversification and holding portfolios of stocks and/or bonds. However, they differ in terms of trading, management, tax efficiency, and availability.

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