ETF vs. Mutual Fund: Which is the Best Option for You? (2024)

Many of us like the thought of investing. Who wouldn’t want to grow their money with little effort? But it can be a complicated mess of jargon, different opinions, and advice out there.

So, we want to cut through the noise and set some things straight. What is the best type of investment to make ETF vs. mutual fund?

If you’re looking tostart investingand want to familiarize yourself with terms like ETF, mutual fund, and index funds, you’re already off to a great start. The best thing to do when starting to invest is research. This blog is a great place to start.

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What’s an ETF?

Let’s start with the basics. An ETF is an exchange-traded fund. By exchange-traded, it simply means that it’s traded on major stock exchanges like the New York Stock Exchange or Nasdaq.

The “fund” part of an ETF means that it’s a collection of several hundred different stocks or bonds merged together into a single fund.

It’s pretty similar to how an index fund works, but there are some important differences.

The biggest difference between an ETF and an index fund is that ETFs are listed, bought, and sold on the stock exchange which means the price can change throughout the day when the markets are open. Index funds will only change the value at the end of the day.

What’s a mutual fund?

Amutual fundis essentially a pool of money collected from several investors that is managed by professional money managers. These managers allocate the fund to produce the best capital gains or income for the investors.

For those who would rather not manage their own investments, mutual funds are a great alternative that’s typically low-risk and diversified. However, there are usually higher costs to pay for actively managed mutual funds.

ETFs and mutual funds have plenty of similarities and differences.

Both ETFs and mutual funds work with a portfolio of stocks and/or bonds and track indexes. By nature, this means that they are generally considered lower risk than investing in individual stocks because you can spread the risk across multiple stocks instead.

Where they differ is in the fees mostly. ETFs are generally more cost-effective and liquid. Mutual funds have the benefit of being actively managed by financial advisors and money managers, but that comes with a higher cost to pay.

Why choose an ETF over a mutual fund?

ETFs are a popular way to invest money, but what makes them so special? Here are some of the top benefits of investing in an ETF.

1. Transparency

With an ETF, all holdings must be published at the end of each day, whereas with a mutual fund, they only need to be published once a month. This means there’s a greater sense of transparency for anyone looking to invest in that particular fund.

2. Diversification

An ETF offers diversification because you can purchase multiple stocks across industries with a simple click of a button. The great thing about this approach is that it lowers your risk. Rather than putting all your eggs in one or two baskets, you spread the risk over a much bigger group of stocks.

3. Instant access

ETFs are traded on the stock exchange which means buying and selling them is like buying a regular stock. The moment you buy them, you own them. This also means you have more control over the price because you can choose to purchase it when the price is lower.

It can really pay to keep an eye on how the price of stocks fluctuate throughout the day and there are plenty of tools out there to keep on top of them, such as online trading accounts or a website likejustETF.com.

4. There’s no minimum investment required

Another advantage that ETFs have over mutual or index funds is that there’s usually no minimum investment required. All you need is the money for the stock you want to buy at that moment.

5. Lower fees

Perhaps one of the most important advantages of an ETF is that the fees are usually much lower than that of an actively managed fund. However, if you are investing heavily in ETFs, beware that the fees can stack up if your broker charges a commission every time you buy or sell.

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Why choose a mutual fund over an ETF?

Not interested in an EFT? If you want a more hands-off approach to investing, perhaps a mutual fund is better suited to you. Here are some of the benefits of using a mutual fund.

1. A hands-off approach

If you don’t like the thought of managing your investments on a day-to-day basis, a mutual fund could be just the ticket.

Mutual funds are actively managed by people who live and breathe the stock market. They follow the market index of several popular stock indexes to track performance.

The downside to this is that like with any human, there’s room for error. It also means that the fees tend to be higher because you have to cover the cost of money managers and analysts.

For those going down this route, the best thing you can do is plenty of research on selecting the right managers for your money. There are lots of different types of money managers, with different levels of experience, so make sure you’re picking one that aligns with your own investment goals.

If you want a hands-off approach but like the idea of an ETF, there are some actively managed ETFs out there as well.

2. Spread the risk

One of the number one reasons why mutual funds are popular is because they allow you to spread the risk like an ETF or index fund.

This means that you can invest in multiple stocks within the fund without having to pick individual shares. This, paired with the active management of your investment, means it could be one of the safer ways to invest your money.

What about tax efficiency?

So, what about taxes, you ask? How much money are you going to hand over to the IRS with either ETFs or mutual funds?

In general, ETFs are considered the more tax-efficient option when compared to mutual funds. However, both are treated the same in the eyes of the IRS. Both are subject to capital gains tax and any dividends you receive will be taxed as well.

The difference is that ETFs are structured in a way where taxes are minimized for whoever buys and sells the stock. An investor will typically incur less tax than if they had a mutual fund.

An accountant will be able to give you the ins-and-outs of what you need to know about either type of fund and reporting any gains to the IRS.

ETF vs. Mutual Fund: Which is the Best Option for You? (1)

Another alternative: index mutual funds

If the thought of trading on the stock exchange or paying money managers huge fees doesn’t appeal to you,there’s an alternative index funds.

Index funds might not be the most glamorous way to invest. But they regularly outperform actively managed funds because fund managers are only human and can make errors.

Why index funds are often your best bet

Index funds are something that I personally invest in. In fact, I’ve been pretty open about this being where the majority of my net worth is not in super-secret hedge funds.

But if you’re not convinced by that alone, here are some great reasons why index funds are an excellent choice.

No loading fees

A loading fee is a fee you pay when you buy or sell a fund. Ideally, you don’t want to pay out in either of these cases. Higher expenses cut into your profits and there’s no evidence that these types of funds perform better in fact, the opposite is often true.

Index funds don’t typically have loading fees because, despite being actively managed, they’re tracked using software that matches the stocks in the market. That means you don’t have to cover the hefty costs of a fund manager or analyst.

Less volatile

If your attitude to risk is anything but absolutely crazy, you’ll appreciate that index funds are one of the least volatile places to put your money. Of course, nothing is guaranteed, but index funds invest in the entire market making them much less volatile.

What’s the catch?

Nothing!

Okay, that’s not entirely true. But the only real downside with index funds is that it means you’ll make money slower. However, if your money stays put, it’s almost certainly going to grow over time.

It all depends on what you want out of investing. If you want to day trade and jump on any change in the market as soon as it happens, perhaps an index fund isn’t for you. If you want to slowly grow your money and set yourself up for a solid future, index funds are the way to go for most people.

They tick all the boxes. Low fees, less risk, passive management, better performance over the long-term – what’s not to love about them?

Does that mean index funds are the only option you should consider? Of course not, ETFs and mutual funds have plenty of benefits as well. Mutual funds are ideal for those who prefer a more hands-off approach and don’t mind about the fees.

ETFs are great for those who want to spread their risk across different stocks and want a fund that regularly updates its price throughout the day. As with anything finance or investment-related, make sure you do plenty of research first!

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ETF vs. Mutual Fund: Which is the Best Option for You? (2024)

FAQs

ETF vs. Mutual Fund: Which is the Best Option for You? ›

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

Is it better to buy an ETF or mutual fund? ›

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

What is the downside of ETFs? ›

ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses.

What is better ETF or mutual fund reddit? ›

Yes an ETF is better for index investing in terms of fees. With index funds, you don't need a demat account and can set up an automated SIP (I don't think there is any SIP like option for ETF) but don't think there is any other advantage. You can do SIP in Zerodha.

What is the number 1 ETF to buy? ›

Top U.S. market-cap index ETFs
Fund (ticker)YTD performanceExpense ratio
Vanguard S&P 500 ETF (VOO)14.8 percent0.03 percent
SPDR S&P 500 ETF Trust (SPY)14.8 percent0.095 percent
iShares Core S&P 500 ETF (IVV)14.8 percent0.03 percent
Invesco QQQ Trust (QQQ)12.1 percent0.20 percent

Can I withdraw ETFs anytime? ›

ETF owners benefit from liquidity as well as broad diversity in their mutual fund portfolio. There is no lock-in since they are open-ended funds providing you with the option of withdrawing your assets as needed.

Which ETF gives the highest return? ›

List of 15 Best ETFs in India
  • Kotak Nifty PSU Bank ETF. 205.5%
  • Nippon India ETF PSU Bank BeES. 200.8%
  • BHARAT 22 ETF. 191.7%
  • ICICI Prudential Nifty Midcap 150 Etf. 106.6%
  • Mirae Asset NYSE FANG+ ETF. 80.6%
  • HDFC Nifty50 Value 20 ETF. 72.4%
  • UTI S&P BSE Sensex ETF. 59.0%
  • Nippon India ETF Nifty 50 BeES. 57.9%
Jul 29, 2024

Why would anyone buy mutual funds over ETFs? ›

In addition to phone support from knowledgeable personnel, mutual funds may offer check-writing options and other shareholder services that ETFs don't provide. Dividend reinvestment plans (DRIPs) take the stress of decision-making by automatically converting dividend distributions into investment growth.

Which is riskier ETF or mutual fund? ›

The short answer is that it depends on the specific ETF or mutual fund in question. In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges.

Why are ETFs so much cheaper than mutual funds? ›

ETFs have transparent and hidden fees as well—there are simply fewer of them, and they cost less. Mutual funds charge their shareholders for everything that goes on inside the fund, such as transaction fees, distribution charges, and transfer-agent costs.

What is the safest ETF? ›

Key Data Points. When it comes to safe investments, the iShares 0-3 Month Treasury Bond ETF is the next safest thing to simply holding cash in your portfolio. The index fund invests in a portfolio of Treasury securities with maturity dates of three months or less.

What is better than ETF? ›

While ETFs provide liquidity, lower expense ratios, and tax efficiency, mutual funds offer active management and broader diversification.

Which ETF has the highest 10 year return? ›

The best-performing ETF in the last 10 years was VanEck Semiconductor ETF (SMH). A $10,000 investment into SMH 10 years ago would be worth over $110K today.

Are ETFs more cost effective than mutual funds? ›

For the most part, ETFs are less costly than mutual funds. There are exceptions—and investors should always examine the relative costs of ETFs and mutual funds. However—all else being equal—the structural differences between the 2 products do give ETFs a cost advantage over mutual funds.

Are ETFs good for beginners? ›

Exchange-traded funds (ETFs) are ideal for beginning investors due to their many benefits, which include low expense ratios, instant diversification, and a multitude of investment choices. Unlike some mutual funds, they also tend to have low investing thresholds, so you don't have to be ultra-rich to get started.

Are ETFs more tax-efficient than mutual funds? ›

Although similar to mutual funds, equity ETFs are generally more tax-efficient because they tend not to distribute a lot of capital gains.

Can you retire off ETFs? ›

“Because they think to themselves 'man, only one fund, it seems too easy,'” he added. “I am happy to report that you can actually just invest in one fund and retire off of it.” Some experts agree that Yang's argument holds merit, particularly with ETFs that offer risk management through diversification and rebalancing.

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