ETFs vs. Mutual Funds: Which To Choose | Vanguard (2024)

FAQs

ETFs vs. Mutual Funds: Which To Choose | Vanguard? ›

An ETF could be more suitable for you.

Key Takeaways. Many mutual funds are actively managed while most ETFs are passive investments that track the performance of a particular index. ETFs can be more tax-efficient than actively managed funds due to their lower turnover and fewer transactions that produce capital gains.

Unlike ETFs, mutual funds can offer more specific strategies as well as blends of strategies. Mutual funds offer the same type of indexed investing options as ETFs but also an array of actively and passively managed options that can be fine-tuned to cater to an investor's needs.

ETFs are generally better for frequent trading because you can buy and sell shares throughout the trading day. Index mutual funds only let you buy and sell at the very end of each trading day. ETFs also give you up-to-date information on the fund investment value throughout the trading day.

Mutual funds diversify investments, reducing risk, but also limit potential gains. Mutual funds are managed by professionals, reducing the need for monitoring, but investors give up control. Stocks offer higher returns but come with higher risk and volatility.

ETFs have transparent and hidden fees as well—there are simply fewer of them, and they cost less. Mutual funds charge their shareholders for everything that goes on inside the fund, such as transaction fees, distribution charges, and transfer-agent costs.

Whether ETFs are a good choice for you depends on what you want to get from your investment. If you're looking for an affordable investment likely to generate moderate returns, sacrificing the potential for higher gains in exchange for lower risk, then ETFs can be an excellent option.

Is ETF better than a mutual fund? Both have distinct advantages; ETFs offer intraday trading and usually lower fees, while mutual funds may provide more active management and potentially higher returns over time.

“Because they think to themselves 'man, only one fund, it seems too easy,'” he added. “I am happy to report that you can actually just invest in one fund and retire off of it.” Some experts agree that Yang's argument holds merit, particularly with ETFs that offer risk management through diversification and rebalancing.

Should I invest in ETF or S&P 500? ›

While dividend ETFs can offer stable income, their growth potential is generally lower over the long run. That said, dividend ETFs may outperform the S&P 500 during particular time frames, such as during a recession or a period of easing interest rates.

With a mutual fund, you buy and sell based on dollars, not market price or shares. And you can specify any dollar amount you want—down to the penny or as a nice round figure, like $3,000. With an ETF, you buy and sell based on market price—and you can only trade full shares.

Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

When investing in equity mutual funds, do it via systematic investment plans (SIPs). By investing a fixed amount at regular intervals, irrespective of prevalent market conditions, you reduce the risk factor further. When markets are down, you get more units, and when markets are up, you buy fewer units.

As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds.

Exchange-traded funds (ETFs) are ideal for beginning investors due to their many benefits, which include low expense ratios, instant diversification, and a multitude of investment choices. Unlike some mutual funds, they also tend to have low investing thresholds, so you don't have to be ultra-rich to get started.

Although similar to mutual funds, equity ETFs are generally more tax-efficient because they tend not to distribute a lot of capital gains.