ETFs vs. Mutual Funds

Comparing ETFs and Mutual Funds

A basic goal for many investors is to gain their desired market exposure in the most efficient and cost-effective way possible. That goal is frequently achieved by investing in either mutual funds or exchange-traded funds (ETFs).¹

While mutual funds historically held the majority of U.S. investment assets, ETFs have experienced explosive growth over the last decade. Driven by a shift toward low-cost passive investing and broader investor adoption, ETFs are now the primary vehicle for market exposure for both retail and institutional investors.²

Both options can be effective tools for long-term wealth building, but key differences in costs, taxes, and trading mechanics tip the scales in favor of ETFs for many investors. Here is what you need to know to choose the right one for your portfolio.

How ETFs and Mutual Funds Are Alike

Before diving into the differences, it helps to understand what these two investment vehicles have in common. For the average investor, mutual funds and ETFs function similarly in several ways:

• Diversification: Both pool money from many investors to buy a basket of stocks, bonds, or other assets, giving you broad diversification with a single purchase.³
• Regulation: Both are regulated in the U.S. by the SEC under the Investment Company Act of 1940.
• Net Asset Value (NAV): Both calculate a per-share Net Asset Value (NAV) at the end of each trading day, representing the total value of the underlying assets minus expenses.
• Flexibility: Both are available in a wide variety of asset classes, ranging from broad-market index funds (like the S&P 500) to highly targeted sectors.

Key Differences Between Mutual Funds and ETFs

Despite their similarities, the operational differences between these two vehicles can have a major impact on your wallet and your investment returns.

1. Trading Mechanics

A significant difference is how you buy and sell them.

• Mutual funds price only once per day. No matter what time you place your order, your trade is executed after the market closes using that day’s final NAV.
• ETFs trade on an exchange throughout the day, just like individual stocks. You can buy or sell shares at any time during market hours at fluctuating market prices.

*Note: Because ETFs trade intraday, their price may experience a slight "premium" or "discount" relative to their true NAV based on supply and demand. However, a specialized institutional process called share creation and redemption generally keeps the market price tightly aligned with the underlying asset value.⁴

2. Tax Efficiency

If you are investing through a taxable brokerage account, ETFs are generally more tax efficient than mutual funds. Both fund types must distribute realized capital gains to investors annually. However, due to operational differences, mutual funds trigger these gains more frequently:

• When a mutual fund investor wants to redeem their shares for cash, the fund manager often has to sell underlying securities to raise cash, which can trigger capital gains taxes for all parties left in the fund.
• ETFs handle redemptions "in kind" through an authorized participant. Instead of selling securities for cash, ETF issuers rely on authorized participants to accumulate fund shares and exchange them for a basket of underlying securities. Because this swap is not a taxable event, remaining ETF investors tend to be shielded from capital gains.

A recent regulatory shift has introduced a "dual share-class" model, allowing fund families (e.g., Vanguard) to offer the exact same strategy as both a mutual fund and an ETF.⁵ Following the expiration of an exclusive Vanguard patent, other large asset managers are now rolling out these hybrid funds. For everyday investors, the biggest perk is the ability to convert your existing mutual fund shares directly into the ETF version on a tax-free basis—giving you a straightforward, cost-effective path to transition to a modern ETF format without triggering a tax bill.

3. Costs and Fees

In almost all scenarios across all categories, ETFs boast lower overall costs than mutual funds.

• Expense ratios: By assets under management, ETFs are predominantly passive index trackers, meaning they tend to have lower management fees. While low-cost index mutual funds exist (for example, Vanguard’s S&P 500 mutual fund and ETF options both have ultra-low expense ratios, around 0.03% to 0.04%),⁶ the average mutual fund is actively managed and carries a higher price tag.⁷
• Transaction costs: Historically, mutual funds carried sales loads (commissions paid to brokers when you buy or sell shares).⁸ Today, ETFs are easily accessible through modern brokerage accounts, almost all of which offer zero-commission trading. ETF investors should be mindful of the bid/ask spread (the minor difference between the buy and sell price), which is negligible for large, highly liquid ETFs.

When comparing costs, it helps to look at the Asset-Weighted Average (what investors actually pay based on where money is moving) versus the Simple Average (what fund companies charge on paper across their entire product lineups):

Fund Category	Asset-Weighted Fee	Simple (Equal-Weighted) Fee	Industry Trend & Insights
Passive ETFs	0.09% – 0.14%	0.49% – 0.52%	Standard broad equity and bond index ETFs average 0.09%, but the simple average is skewed upward by the launch of complex, thematic, and leveraged passive funds.
All ETFs	0.17% – 0.19%	0.55% – 0.58%	Total ETF costs remain incredibly low on an asset-weighted basis due to massive indexing scale. However, the equal-weighted average is rising rapidly as issuers flood the market with higher-fee active and specialized ETF wrappers.
Passive Mutual Funds	0.11%	0.42%	Traditional index mutual funds from low-cost leaders are heavily favored by investors, though equal-weighted pricing remains higher due to legacy, unbundled share classes.
All Mutual Funds	0.40% – 0.42%	0.78% – 0.82%	This category combines both active and passive mutual funds. Asset-weighted number continue to decline sharply as investors move away from more expensive mutual funds.
Active Funds (All Formats)	0.57% – 0.58%	1.00%	Across active equity and bond strategies, the average fund charges a 1.00% flat rate, but the true cost investors pay is closer to 0.57% because assets flow heavily to lower-cost active providers.

Source: Morningstar’s 2026 Annual US Fund Fee

4. Portfolio Transparency

ETFs offer greater transparency, by informing the investor more frequently on what exactly the fund owns.

• ETFs generally publish their exact portfolio holdings online each day.⁹
• Mutual funds are only required to disclose their holdings quarterly, often with a 30-day lag, meaning the data you see is frequently stale.

Comparison at a Glance

Feature	Mutual Funds	ETFs
Trading Frequency	Once per day (at market close)	Continuously throughout the trading day
Management Style	Primarily active (though passive exists)	Primarily passive (though active number of funds is growing)
Tax Efficiency	Lower (potential annual capital gains)	Higher (rarely triggers internal capital gains)
Transparency	Quarterly disclosures	Daily disclosures (typically)
Availability in 401(k)s	Standard / Widely Available	Limited (usually requires a brokerage window)

Which Is Right for You?

While both vehicles offer diversification, we believe that ETFs provide a more efficient, cost-effective, and tax-advantaged path for long-term wealth building. For these reasons, our investment philosophy strongly favors the use of ETFs to implement a disciplined, low-turnover, and low-cost investment plan designed to meet your financial goals.

Ultimately, we believe ETFs are the preferable vehicle to help you reach your financial milestones, providing the optimal balance of low fees, structural transparency, and tax efficiency along the way.

1. For purposes of this discussion, we use the term “mutual fund” to refer to the open-end funds utilized by the vast majority of mutual fund investors. Closed-end funds and unit investment trusts, which each share some similarities with both open-end mutual funds and ETFs, hold a smaller share of investor assets in the U.S. Therefore, we have elected to limit the discussion to the vehicle most relevant to the average investor.
2. State Street, “2026 Global ETF Outlook: From Wrapper to Backbone,” April 2026. https://www.statestreet.com/web/insights/articles/documents/2026-global-etf-outlook-from-wrapper-to-backbone.pdf
3. Investor.gov, “Exchange-Traded Fund (ETF),” accessed June 5, 2026. https://www.investor.gov/introduction-investing/investing-basics/glossary/exchange-traded-fund-etf
4. Charles Schwab Asset Management, “Understanding the ETF Creation and Redemption Mechanism,” November 26, 2024. https://www.schwabassetmanagement.com/content/understanding-etf-creation-and-redemption-mechanism
5. Firstcard, “S&P 500 Funds Explained: Index Funds vs ETFs,” May 23, 2026. https://www.firstcard.app/learn/sp-500-fund
6. S&P Global, “SPIVA U.S. Scorecard Year-End 2025,” 2026. https://www.spglobal.com/spdji/en/documents/spiva/spiva-us-year-end-2025.pdf
7. J.P. Morgan Asset Management, “ETF as a Share Class is Here, What is Next?” March 23, 2026. https://am.jpmorgan.com/us/en/asset-management/adv/insights/etf-insights/the-etf-as-a-share-class-is-here
8. Unlike ETFs, which trade under a single structure on the open market, a single mutual fund often issues multiple "share classes" (such as Class A, C, or Institutional) to determine how advisor commissions and fees are paid. Class A shares typically feature a front-end sales load (an upfront commission deducted from your initial investment), while Class C shares utilize a level load (a recurring annual fee), and Institutional or "No-Load" classes feature no sales charges at all. Morningstar, “Descriptions of Share Class Types,” accessed June 5, 2026. https://morningstardirect.morningstar.com/clientcomm/Share_Class_Types.pdf
9. While the vast majority of ETFs disclose holdings daily, a newer category known as Active Semi-Transparent ETFs (or "Less-Transparent" ETFs) allows active fund managers to protect their proprietary investment strategies from copycat trading or front-running. These funds are only required to disclose their exact holdings quarterly or monthly. However, because they represent a very small fraction of the overall ETF market, most retail investors will primarily encounter fully transparent, daily-disclosing funds.

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