ETFs vs. mutual funds

Exchange-traded funds (ETFs) are different from mutual funds (both index-based and actively managed) in several respects:

  • ETF prices change throughout the day like stocks, while mutual fund prices change at the end of each day, based on the closing values of the stocks held by the fund.
  • An ETF’s holdings are always known to the market (transparent), whereas actively managed mutual funds are not required to disclose exactly what securities they currently hold.
  • ETFs typically have lower average annual fees than comparable index-based mutual funds, and much lower fees than actively managed mutual funds (ETF costs and fees).
  • ETFs don't have investment minimums or special sales charges (‘loads’) like some mutual funds. But you must pay a brokerage commission each time you buy or sell ETF shares.
  • ETFs are generally more tax efficient than mutual funds. You pay capital gains on ETFs like a stock (based solely on when you buy and sell). With mutual funds, not only are you taxed on gains when you sell, but you may also owe taxes based on periodic capital gains distributions the fund makes to you (ETFs and taxes).