ETF vs Mutual Fund

How ETFs Work

ETFs (Exchange-Traded Funds) trade on stock exchanges like regular stocks. You can buy and sell throughout the day at market prices. Examples: SPY, VOO, VTI, QQQ.

When you buy an ETF, you're buying shares on the open market from another investor. The price fluctuates throughout the day based on supply and demand (though it closely tracks the underlying assets).

How Mutual Funds Work

Mutual funds trade once per day at NAV (Net Asset Value), calculated after market close. You submit orders during the day, but they all execute at the same end-of-day price.

When you buy a mutual fund, you're transacting directly with the fund company. You buy at NAV, regardless of what you ordered at 10am or 3pm.

Key Difference #1: Trading

ETFs: Buy or sell any time the market is open. You see the price, you click buy, you own it. Can use limit orders, stop losses, etc.

Mutual funds: Order any time, but all orders execute at end-of-day NAV. If you order at 10am when the market is up, and it crashes by 4pm, you buy at the crashed price.

Key Difference #2: Minimums

ETFs: Buy as little as $1 with fractional shares (at most brokers). Or buy one share at current price.

Mutual funds: Often have $1,000-$3,000 minimums for initial investment. Subsequent investments may have lower minimums (e.g., $100).

Key Difference #3: Costs

ETFs: Generally have lower expense ratios. VOO (Vanguard S&P 500 ETF) charges 0.03%. Trade commission-free at all major brokers.

Mutual funds: Index funds can match ETF expenses (VFIAX charges 0.04%). But actively managed funds often charge 0.5-1.5%. Some brokers charge transaction fees ($20-$50) for non-proprietary funds.

Key Difference #4: Tax Efficiency

ETFs win here. Due to their structure (in-kind redemptions), ETFs rarely distribute capital gains. Mutual funds must distribute gains when they sell holdings—even if you didn't sell your shares.

In taxable accounts, this matters. A mutual fund might send you a tax bill for gains you didn't realize. ETFs almost never do.

Key Difference #5: Automatic Investing

Mutual funds win here. You can set up automatic monthly investments of exact dollar amounts ($500/month to VTSAX). The fund handles fractional shares automatically.

ETFs: Harder to auto-invest exact amounts. Some brokers now offer automatic fractional ETF purchases, but it's less common.

When to Choose ETFs

• Taxable accounts — Better tax efficiency
• You want to trade during the day
• Starting with small amounts — No minimums
• You want lowest expenses
• You want to use limit orders

When to Choose Mutual Funds

• Automatic investing — Exact dollar amounts monthly
• 401(k) accounts — Often only mutual fund options
• You don't care about intraday trading
• Specific fund only available as mutual fund

Popular Equivalent Pairs

The Bottom Line

For most individual investors in taxable accounts, ETFs are the better choice. Lower expenses, better tax efficiency, and flexibility to trade anytime.

For 401(k) accounts or automated investing, mutual funds may be more convenient.

The good news: The underlying investments are often identical. VOO and VFIAX both track the S&P 500. Your long-term returns will be virtually the same. Don't stress the choice—just start investing.