ETFs vs. mutual funds: What’s the difference?

Exchange-traded funds (ETFs) and mutual funds are two ways to invest. In general, both allow investors access to diversified portfolios of securities without selecting each individual security. But ETFs and mutual funds are far from identical.

Learn about some key similarities and differences between ETFs and mutual funds and become a more informed investor.

Key takeaways

• ETFs and mutual funds are both investment companies registered with the Securities and Exchange Commission (SEC) that allow people to invest in a diversified portfolio of stocks, bonds and other securities. 
• Investors can buy mutual fund shares directly or through a brokerage account. But ETF shares can only be bought through a brokerage account.
• ETFs can be bought and sold while the market is open. And their market price can fluctuate throughout the day and may differ from their net asset value (NAV).
• Sale or purchase orders for mutual funds can only go through after the market is closed and their NAV is set. A mutual fund’s NAV is set once a day, and it’s typically the same as its market price.
• ETFs and mutual funds may also have different fees and tax implications.

ETFs and mutual funds are both investment companies registered with the Securities and Exchange Commission (SEC) that give people a way to invest in a diversified portfolio of stocks, bonds and other securities. 

The SEC also notes some other key similarities between ETFs and mutual funds, saying both types of funds: 

• Are typically managed by SEC-registered investment advisors.
• May give investors a low-cost way to start investing.
• Are relatively liquid investments, meaning it’s relatively easy to turn them into cash. 
• Don’t let individual investors directly control the securities that are included in the fund.

ETFs and mutual funds also have some important differences. And knowing about them may help inform investment decisions. 

One major difference between buying and selling ETFs and mutual funds has to do with timing. ETFs can be bought and sold while the market is open. And their prices can fluctuate throughout the day.

A mutual fund’s price is set once a day after the market closes. Orders to buy or sell shares of a mutual fund can be placed anytime, but the order won’t go through until after that daily price is set.

Investors can buy mutual fund shares directly from the mutual fund company. Or they can use a brokerage account to buy mutual fund shares. ETF shares, on the other hand, have to be bought through a brokerage account. 

A mutual fund’s net asset value (NAV) is set once a day after the market closes. A NAV is a fund’s total assets minus its total liabilities, according to the SEC.

This means that investors who place an order to buy into a mutual fund while the market is open may not know what exactly they’ll pay for each share. The same goes for selling shares. And any purchase and sale orders made while the market is open won’t go through until after the market closes for the day and the fund’s daily NAV has been set. 

ETFs can be traded in real time while the market is open. And an ETF may have a market price that’s different from its NAV. So depending on market conditions, ETFs may be bought or sold at a discount or premium.

Mutual funds and ETFs may both come with fees and expenses that reduce an investor’s returns. Fees and expenses vary by fund. But they may include things like transaction fees and operating expenses. 

The SEC notes that ETFs tend to have lower fees than comparable mutual funds. But because mutual funds can be purchased directly from the mutual fund company—unlike ETFs, which require a brokerage account—it may be possible to avoid brokerage fees and commissions.

The SEC also warns against investing in things you don’t understand. It’s important to read a fund’s prospectus—an SEC-required written document that provides details about a fund to help inform investors—before making any decisions. The prospectus will include information about the fund’s fees, taxes, investment objectives and more. 

You can find a mutual fund or ETF’s prospectus using the SEC’s EDGAR database. And if you need help making informed investment decisions, consider talking to a qualified investment professional. 

Investors typically have to pay income taxes on any capital gains, dividends and interest that are distributed to them from both ETFs and mutual funds. In that way, both kinds of funds are the same when it comes to taxes. 

ETFs tend to have fewer taxable events—like selling securities that produce taxable capital gains—compared to mutual funds because of how ETFs are structured. 

But the SEC also says that this tax efficiency is irrelevant if an ETF or mutual fund is held in a tax-advantaged account like an IRA or 401(k).

Diversification is one way to potentially lower overall investment risk. And both ETFs and mutual funds can be relatively easy ways to diversify. 

And while all investments carry some level of risk, there isn’t more inherent risk tied to either ETFs or mutual funds. Instead, how risky a fund is depends on things like the investment strategy and the kinds of securities in the fund. 

Investing can be a way to help build wealth. But the SEC reminds investors, “You can lose money investing in mutual funds or ETFs.” If you need help figuring out what types of investments are right for you, consider talking to a qualified investment professional. 

ETFs and mutual funds are both ways to diversify an investment portfolio. But ETFs and mutual funds have some important differences that affect fees, expenses, taxes, prices and more.

Want to learn more about different types of investments and financial goals? Check out this guide on investing or consider contacting a qualified professional.