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Apr 2024

Exchange Traded Funds (ETFs) versus Mutual Funds

By Mike Leavy, CFA®

If the difference between exchange traded funds (ETFs) and mutual funds seems clear as mud, you are in the right place. In this post, we will demystify the two so that you can be confident about when to use one versus the other, or why you may already own some of each.

What are ETFs and mutual funds?

ETFs and mutual funds pool the money of thousands of investors so those investors can buy a single investment, which in turn owns many individual stocks, bonds, or other securities – gaining valuable diversification without having to separately purchase the hundreds or thousands of underlying individual securities. There are other types of pooled investment vehicles, but ETFs and mutual funds are the most accessible and cost effective ways to diversify your investments in the stock and bond markets.

What is the difference?

Below are the primary ways in which ETFs and mutual funds are similar and different.


Mutual Funds



  •  Many ETFs never issue capital gains distributions to individual investors, normally making them more tax-efficient

  •  Subject to more capital gains distributions


Fees and Costs

  •  Expenses tend to be lower

  •  No sales loads or ongoing 12b-1 sales fees

  •  Generally $0 or low brokerage commissions

  •  Expenses tend to be higher

  •  Potential one-time and ongoing sales fees

  •  Generally higher average brokerage commissions


Trading Frequency

  •  Can be bought and sold throughout the trading day, giving investors more control over their transaction price

  •  Can be bought and sold once per day, at the market closing price


Pricing Discrepancies

  •  ETF trades involve costs such as bid-ask spreads and premiums or discounts to the value of the underlying securities

  •  Most mutual funds trade once per day at the market closing price, so pricing discrepancies are muted

Mutual Funds

Trading Restrictions

  •  ETFs are precluded from imposing trading restrictions, or from closing funds to new investors

  •  Mutual funds may impose restrictions, such as redemption fees, prohibitions on buying back sold shares, or closing funds to new investors 


Effects of Money Flows

  •  Fund flows into or out of ETFs do not affect existing shareholders 

  •  Fund flows into and out of mutual funds change the characteristics of investments for existing shareholders.


Balancing out the attributes: which is better?

Exchange traded funds and mutual funds represent excellent ways for investors to get broad diversification efficiently and at a low cost. ETFs offer a clear advantage as outlined above, which is amplified for investors such as our clients who avoid excessive trading.

While ETFs are generally superior, mutual funds are preferred in two primary instances. The first is when there is a segment of the market an investor wishes to gain exposure to, but for which no ETF exists. ETFs are newer vehicles than mutual funds, so the latter still offer coverage in more market segments. The second is if a particularly modest amount of money is at play. Investors can buy most mutual funds based upon any amount of money, even as low as $5. However, ETFs must be purchased based upon shares, and if the price per share happens to be $475, and an investor has $450, they cannot buy the ETF since the smallest increment is $475.

Though there are more intricacies than fall within the scope of this post, you are now armed with enough knowledge on the distinction between ETFs and mutual funds to impress even the professional investor at your next cocktail party. And of course, if you have additional questions about ETFs versus mutual funds, we love talking about this stuff, so please reach out to us.

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.


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