Both ETFs and mutual funds pool money to buy many investments at once. ETFs trade throughout the day like a stock and are usually more tax-efficient. Mutual funds are bought and sold once a day at the closing price and sometimes require a minimum investment. For most beginners in a regular brokerage account, ETFs are simpler.
How they stack up
General ranges, not a rating of any specific investment. Yields and rates change over time.
Which fits when
- You invest in a regular brokerage account
- You want low costs and no minimums
- You want fewer surprise tax bills
- Your 401(k) or workplace plan offers them
- You want automatic investing of exact dollar amounts
- You already own a low-cost index fund you like
Why ETFs tend to cost less in taxes
When many people sell a mutual fund, the fund may have to sell holdings to pay them, and any gains get passed to everyone still in the fund as a taxable distribution. ETFs usually avoid this because of how their shares are created and redeemed. In a retirement account this does not matter, but in a regular brokerage account it can save you money every year.
Active vs index matters more than the wrapper
The bigger question is what the fund holds and what it charges. An index fund that tracks the market with a tiny fee is a strong choice whether it is an ETF or a mutual fund. A fund that charges a high fee to pick stocks has to beat the market by that much just to keep up.
Many people own both: mutual funds in a 401(k) because that is what the plan offers, and ETFs in a brokerage account or IRA.
Questions people ask
Are ETFs better than mutual funds?
For most people investing in a regular brokerage account, ETFs are simpler, have no minimums and tend to be more tax-efficient. A low-cost index mutual fund is also a solid choice, especially inside a retirement plan.
Do ETFs pay dividends?
Yes. When the companies inside an ETF pay dividends, the ETF passes them to you, usually every month or every quarter.
What is an expense ratio?
It is the yearly fee a fund charges, shown as a percentage of what you invest. A 0.05% expense ratio costs $5 a year on $10,000.
More side-by-sides
Keep reading: Stocks, ETFs, Mutual Funds and REITs · What Is an Index Fund?
For education only and not personalized investment, tax or legal advice. Ranges are general illustrations, not a prediction or a promise of results. All investing involves risk, including the possible loss of principal. Tax rules change; check current IRS figures or a tax professional for your situation.