Compared to mutual funds, which have been around since the 1920s, ETFs (exchange-traded funds) were first developed in the 1990s as alternatives to mutual funds to provide individual investors with access to passive, indexed funds. However, since then, ETFs have grown tremendously in popularity. Now there are many types of ETFs available with passive or active management, though the emphasis on market indexing remains, and all types of investors and traders use them.(1)
Similarities Between Mutual Funds and ETFs
Both types of funds share these basic advantages:
- Diversification without the complexity of buying lots of different investments separately.
- A wide range of investment options, including U.S. and international stocks and bonds and even sometimes commodities or precious metals, plus the ability to invest in the broad market or a narrow segment of it.
- Oversight by professional managers and careful regulation with experts choose and monitor the individual stocks and bonds in the fund.
Beyond these benefits, however, whether or not to invest in ETFs vs. mutual funds will most likely depend on your investment goals and strategies.
Differences Between Mutual Funds and ETFs
Mutual funds and ETFs are both popular investment vehicles, but they have key differences that might appeal to different types of investors:
- ETFs provide greater liquidity as they can be bought and sold throughout the trading day, while mutual funds are traded once a day at the end of the trading day.
- Mutual funds are actively managed by professional fund managers who select and trade securities, while many ETFs are passively managed, tracking a specific index, although there are also actively managed ETFs.
- ETFs generally have lower expense ratios than mutual funds due to their passive management approach.
- ETFs often offer tax advantages, as they can trigger capital gains taxes less frequently than mutual funds.
ETFs & Mutual Funds – Comparison Chart
Features | ETFs | Mutual Funds |
---|---|---|
Investment Minimums | Lower or No Minimum Investment Requirements:
| Higher Minimum Investment Requirements:
|
Trading Options | Real-Time Trading:
Enhanced Trading Flexibility:
No Minimum Holding Periods:
| End-of-Day Pricing (NAV):
Limited Trading Flexibility:
Minimum Holding Periods:
|
Fees & Costs | Lower Management Costs:
Lower Transaction Costs:
| Higher Management Costs:
Transaction Costs:
|
Tax Efficiency | Lower Frequency of Taxable Events:
Structural Tax Efficiency:
Deferred Taxation:
| Annual Taxation:
Frequent Trading:
Distribution of Capital Gains:
|
Is It Better to Invest in ETFs or Mutual Funds?
As you can see, there are differences between ETFs and mutual funds that may affect their cost, performance, and how they can be traded.
To figure out whether ETFs or mutual funds are best for your portfolio, you need to weigh these differences against your own strategies and goals. Get in touch with our experts, and consult with a Kayne Anderson Rudnick wealth advisor today.
This report is based on the assumptions and analysis made and believed to be reasonable by Advisor. However, no assurance can be given that Advisor’s opinions or
expectations will be correct. This report is intended for informational purposes only and should not be considered a recommendation or solicitation to purchase securities.
The information provided here should not be considered to be tax advice and all investors should consult their tax advisors about the specifics of their own tax situation
to determine any proper course of action for them. KAR does not provide tax advice and nothing herein should be construed as tax advice, and information presented here
may not be true or applicable for all income tax situations. Past performance is no guarantee of future results.
