ETFs and mutual funds both pool money into a diversified portfolio, but they differ in mechanics. ETFs trade on exchanges throughout the day at market prices, while mutual funds buy and sell once daily at their net asset value.
Costs tend to favor ETFs, with rock-bottom expense ratios and no sales loads at most brokers. Mutual funds can offer advantages too, like fractional investing with no share-price minimums and the ability to set up automatic contributions easily.
Tax efficiency is another tiebreaker. ETFs generally distribute fewer capital gains because of how their shares are created and redeemed, which can matter in taxable accounts. In retirement accounts, the distinction fades.
Key takeaways
- ETFs trade intraday; mutual funds price once daily
- ETFs usually cost less and are more tax-efficient
- Mutual funds make automatic investing simpler
