How are ETFs different from mutual funds?
February 22, 2017
ETFs and mutual funds are more similar than different. After all, they are both good ways to invest in index funds. So when does it make sense to invest in an ETF? Here are four questions that can help you decide:
Are you seeking an actively-managed or indexed strategy?
- While mutual funds offer both actively managed and index fund strategies, a majority are actively managed and seek to outperform a stated benchmark.
- Most ETFs are passively managed strategies that seek to mirror holdings of indexes such as the S&P 500 and Dow Jones Industrial Average.
How much flexibility and control do you want?
- Mutual funds can be traded once a day. The attractiveness of this option is simplicity. All trade orders receive the same daily price calculated at end of the trading day.
- ETFs, conversely, offer the flexibility to be traded throughout the day when the market is open. This intraday liquidity offers flexibility and greater control over the timing, and potentially, at what price you trade ETFs.
Is your desired mutual fund available through your brokerage account?
- Depending on what funds are offered on your brokerage account platform, your mutual fund options can vary, and sometimes widely. Your Vanguard Brokerage Account opens the door to more than 16,000 mutual funds.
- In contrast, because ETFs trade on exchanges, just like stocks, any investor with a brokerage account can buy or sell virtually any ETF.
How long do you plan to hold the investment?
- ETFs don't have restrictions on frequent trading like most mutual funds. If you're planning on investing for a short period—for example, within two months for purposes such as tax loss harvesting—ETFs may be a better choice.
Do you prefer a lower investment minimum?
- You can buy an ETF for the cost of a single share, which can be as little as $100.
- The minimum to invest in a Vanguard mutual fund can be as low as $1,000.†
Whether your next investment move is with an ETF or a mutual fund, Vanguard offers both, and we believe both can serve a purpose together in your investment plan. Because ETFs and mutual funds are more similar than different, focusing on your investment objective, flexibility needs and the total cost differences of either vehicle, can help you make an educated decision.
Want more information? You can find more on the differences between ETFs and mutual funds in the following table.
|Management||The majority of ETFs are indexed, or passively managed funds.||Mutual funds can be actively or passively managed, but the majority are actively managed.|
|Trading & pricing||You can trade ETFs on the major stock exchanges anytime during the trading day. ETF prices fluctuate throughout the day just like stocks.||Mutual fund shares are priced once a day after the markets close.|
|Transaction costs||You won't pay any commissions to trade Vanguard ETFs in a Vanguard Brokerage Account.*
There's an unavoidable cost when trading individual stocks, bonds, and ETFs known as the bid-ask spread.
|In most circumstances, there are no transaction costs when you buy and sell your mutual fund shares at Vanguard.**|
|Automatic investing||There's no automatic investment option for ETFs.||Invest your savings on a regular schedule by moving money directly from your bank account into your Vanguard accounts or set up automatic transfers from one Vanguard fund to another.
Put your savings on autopilot.
|Minimum investment||You can buy an ETF for the cost of a single share, which can vary throughout the trading day.
See a complete list of Vanguard ETFs
|You can invest in a Vanguard mutual fund with as little as $1,000.†
See a complete list of Vanguard mutual funds
* Trading limits, fund expenses, and minimum investments may apply.
** Some purchase and redemption fees may apply, depending on the fund and how long you've held the investment.
† The minimum initial investment for Vanguard Target Retirement Funds and Vanguard STAR Fund is $1,000. A $3,000 minimum applies to most other funds. Fund-specific details are provided in each fund profile.
- You must buy and sell Vanguard ETF Shares through a broker like Vanguard Brokerage Services (we offer them commission-free) or through another broker (you may incur commissions). See the Vanguard Brokerage Services commission and fee schedules for limits. Vanguard ETF Shares aren't redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. Like stocks, ETFs are subject to market volatility. When buying or selling an ETF, you'll pay or receive the current market price, which may be more or less than net asset value.
- All investing is subject to risk, including the possible loss of the money you invest.