ETFs vs. Mutual Funds: Key Differences Investors Should Know

Exchange-traded funds (ETFs) and mutual funds may appear similar to most investors nowadays, offering diversified baskets of stocks, bonds, and other assets managed by professionals. However, key differences in trading, taxes, fees, and accessibility can make one option more suitable than the other, according to financial experts and Morningstar research.

Trading Mechanics

ETFs trade on stock exchanges like individual stocks, allowing investors to know the exact purchase price at the moment of transaction. Mutual fund trades, placed directly with the fund, are priced at the end of the trading day. Gloria Garcia Cisneros, a certified financial planner in Los Angeles, said these differences matter more to day traders than to long-term investors. Bryan Armour of Morningstar cautioned, “Even in a scenario where you’d want to sell intraday, it’s [often] emotion-based and usually not a good way to invest.”

Man using a laptop | Source: Pexels

Tax Efficiency

ETFs are generally more tax-efficient. Only 6.5% of U.S. stock ETFs distributed capital gains to investors in 2024, compared with 78% of mutual funds, Morningstar reported. “ETFs are way more tax-efficient,” Armour said. Lee Baker, a financial planner in Atlanta, warned mutual fund holders of “a nasty surprise in the form of capital gains and a tax bill.” However, ETFs lose this tax advantage in retirement accounts like 401(k)s.

Fees and Accessibility