ETFs vs Mutual funds
How do mutual funds and ETFs compare?
Both mutual funds and exchange-traded funds (ETFs) pool money from many investors and invest that money in securities. Likewise, many investors own a mix of these funds. Before you decide what’s right for you, there are things to consider.
Mutual funds and ETFs are pooled investment funds that offer investors a stake in a diversified portfolio.
How they’re most similar
Both generally provide broad, diversified exposure to an asset class, region, or a specific market niche.
However, there are some crucial differences.
Mutual fund trades are executed once a day, at a single price. ETFs are exchange-traded and can be bought and sold intraday at different prices.
Among the most important is that ETF shares are traded on stock exchanges like regular stocks, while mutual fund shares are traded only once daily after markets close. This means ETFs can be traded anytime during market hours, offering more liquidity, flexibility, and real-time pricing. This flexibility means you can short sell them or engage in the many strategies you would use for stocks.
Another significant difference is pricing and valuation. ETF prices, like stocks, fluctuate throughout the day according to supply and demand. Meanwhile, mutual funds are priced only at the end of each trading day based on the NAV of the underlying portfolio. This also means that ETFs have the potential for larger premiums/discounts to NAV than mutual funds.
Compared with mutual funds, ETFs tend to have certain tax advantages and are often more cost-efficient.
Reading material
Dive deeper into ETF & mutual fund similarities & differences: