We have a lot of clients asking about the differences between ETFs and mutual funds (active and passive). Determining whether an ETF or mutual fund is better depends on your situation and what you are trying to accomplish.
Here are a few key points to remember:
- ETFs are traded more like stocks, while mutual funds can only be purchased at the end of each trading day
- ETFs tend to have low annual operating expenses because they are primarily passive investments that seek to replicate the performance of an index
- ETFs and index mutual funds are generally more tax efficient than actively managed funds because they tend not to distribute a lot of capital gains
- Consider ETFs if you trade actively, want niche exposure that an index mutual fund cannot offer, and you’re tax sensitive
- ETFs can have trading commissions and large bid/ask spreads, which can add up if you trade actively
- Mutual funds don’t have trading commissions, but they do carry an expense ratio and potentially other sales fees (“loads”)
- Mutual funds allow for automatic investments if you invest on a frequent schedule.