ETFs vs. Mutual Funds
ETFs, Active ETFs and Mutual Funds; What’s the Difference?
Investors have more choice than ever in how to invest. Choosing how to invest depends on your goals: is price control and trading flexibility important? Or, do you want to put your investment on autopilot? There are potential benefits of both mutual funds and exchange-traded funds (ETFs) and many investors use both in their portfolios
Mutual funds allow investors to pool their funds to purchase a selection of securities, offering investors the benefit of professionally managed portfolios at an affordable cost.
An exchange-traded fund (ETF) is a security which can be purchased or sold on a stock exchange. ETFs represent a selection of securities and typically track the performance of an index. The price of an ETF share fluctuates throughout the trading day as they are bought and sold on an exchange
Passive ETFs are designed to track an index and can be a cost-effective way to access a broad market or a specific sector. For example, an ETF that tracks the S&P 500 will offer exposure to the top 500 companies by market capitalization in the United States. It’s also possible to invest in specific sectors and themes, such as health care, fast-food restaurants, or geographic regions using ETFs.
Active ETFs offer the possibility of outperforming an index, using an active investment process overseen by portfolio managers, who select specific companies to include in the fund. Investing in categories where specific knowledge or experience offers the potential for better long-term returns is a typical use-case for active ETFs.
| ETF | Mutual Fund | |
|---|---|---|
| Buy or sell | On an exchange throughout the day | Through mutual fund companies, or brokerage firms |
| Pricing | Intraday pricing- can trade closer to underlying fair-value NAV throughout day | Priced once a day, at market close |
| Ability to view holdings | Full holdings are published each day | Published each quarter, often on a 30-day lag |
| Potential tax implications | Generally considered more tax efficient, capital gains are triggered by investor activity, when they sell their ETF shares | Fund trading activity may generate capital gains which are distributed to all fund investors |
| Automatics investment or reinvestment | Brokerage platform specific | Can reinvest dividends or automatically contribute additional funds |
| Minimum investment | One share | Varies by fund, can be as low as $1000 |