Mutual Funds Vs. ETFs: Which You Invest In?

Mutual funds and ETFs are both great investment options. But one may be better for you depending on your investment style. Here's how to choose which you should invest in.

If you’re trying to figure out how to get started investing, it’s easy to get overwhelmed. There are many investments to choose from. You can buy stocks, bonds, exchange-traded funds, mutual funds, precious metals, real estate investment trusts, and more.

Two popular options are very similar but do have some major differences. These two are exchange-traded funds and mutual funds.

One of the main questions you might be wondering is what’s the difference between a mutual fund and an exchange-traded fund (ETF)?

Here’s what you need to know.

What’s Ahead:

What is a mutual fund?

Mutual funds are run by asset managers that work at large companies like Vanguard and Fidelity. Each mutual fund has a goal to invest in particular assets. When you buy a mutual fund, you’re essentially investing in whatever the mutual fund invests in.

They typically have minimum investment requirements

Many mutual funds have a minimum initial investment required to buy into the fund. Some funds may not have minimums while other funds could have a minimum of $10,000 or more. These high minimum funds can be a big barrier to investing for those just getting started. However, once you own a mutual fund, you can usually buy fractional shares.

They can offer active or passive investing

Mutual funds can practice active or passive investing strategies. Actively managed mutual funds try to beat the market by trading stocks and other investments based on a set strategy.

Passively managed mutual funds instead set an investment strategy and don’t try to time the market. Many passively managed mutual funds are known as index funds that aim to track a particular index such as the S&P 500.

Mutual funds have management fees

When you buy a mutual fund, you’re buying it from the company that manages it, not another investor. Mutual funds usually charge higher expense ratios because they require more management on the asset manager’s part, especially for actively managed funds.

Mutual funds can also require you to hold the fund for a certain time period or pay an early withdrawal penalty. These penalties usually exist to prevent frequent trading which may increase the costs the funds incur.

Who should invest in mutual funds?

Those who don’t care to pick their own stocks and bonds

Investing in a mutual fund can be a great choice if you don’t like picking individual stocks and bonds. Since mutual funds only update their price at the end of each business day, investors that don’t care for the fluctuation in price throughout the day may be better suited to a mutual fund.

Those who want to actively manage their funds

Additionally, those looking for more active management of investments to try to maximize gains will likely find mutual funds preferential to exchange-traded funds.

As always, you should consult with a financial professional such as a Certified Financial Planner or another financial advisor to help determine if a mutual fund is suitable for your investing goals.

Where to invest in mutual funds

Investing in mutual funds can be free or require a transaction fee depending on your brokerage firm and which mutual fund you invest in.

Here are a few examples of costs:

**E*TRADE**

In total, E*TRADE offers over 9,000 mutual funds to purchase. E*TRADE offers over 4,400 no load and no transaction fee funds that are free to trade. There is an early redemption fee for the no load and no transaction fee funds of $49.99.

They also offer transaction fee funds which cost $19.99 per trade.

Vanguard

Vanguard’s 140+ mutual funds don’t charge transaction fees, but some of them may charge purchase and redemption fees which are usually a percentage of your purchase price.

Vanguard offers over 3,000 non-Vanguard mutual funds with no transaction fees when you trade online as long as you don’t redeem them within 60 calendar days of the most recent purchase’s trade date. If you do, there is a $50 early redemption fee on these funds.

There are also over 6,000 non-Vanguard mutual funds that are available with transaction fees that go as high as $20 per trade for online trades and $50 per trade for phone trades.

Fidelity

In total, Fidelity offers access to over 10,000 mutual funds from hundreds of mutual fund companies. Fidelity offers its own mutual funds which do not charge a transaction fee.

They also offer no transaction fee funds that aren’t Fidelity funds. These have no purchase transaction fees. Redemption transaction fees are $49.95, but only if the mutual fund is held less than 60 days.

Most other non-Fidelity mutual funds that charge transaction fees are $49.95 per purchase and $0 per redemption. That said, certain funds have a transaction fee of $75.

As with Vanguard, certain funds may charge other non-transaction fees including purchase or redemption fees.

What is an ETF?

An exchange-traded fund, or ETF for short, is like a mutual fund in some ways, but very different in others.

ETFs are traded on an exchange

Rather than reprice at the end of every day, ETFs are actually traded live on an exchange. Instead of buying from the mutual fund company, ETF transactions are made between one investor that sells their shares and another that buys the shares. You can buy or sell throughout the day rather than just at the end of each day.

No minimum investment requirements

When you buy ETFs, you can buy a single share for the share price. You don’t have to make a minimum investment like some mutual funds require. This can make investing much easier when you’re first getting started. Some investing platforms may also offer fractional ETF share investing.

ETFs track indexes for the most part. That means they aren’t actively managed or trying to beat the market. Instead, they aim to match an index’s performance, such as the Dow Jones Industrial Average or S&P 500.

The cost of ETFs are typically cheaper than mutual funds

Due to the fact that there is less involved in managing an ETF, the costs are typically lower than mutual funds.

The way ETFs work also reduces the amount of buying and selling that a manager has to do within a fund while managing it. This may reduce the tax impacts by not having as many gains or losses to distribute compared mutual funds.

Who should invest in ETFs?

If you want to invest in a fund that tracks an index, an ETF might offer a lower cost option. You may also prefer ETFs if you hold your funds in a taxable investment account and want to minimize the distributions of taxable gains and losses before you decide to sell your assets.

Those that want to actively trade throughout the day will prefer ETFs as you can make trades in real-time versus once per day.

Where to invest in ETFs

Each brokerage typically offers the ability to invest in their own ETFs. Many brokerages allow you to invest in other ETFs, too. However, they may charge a fee for this service.