Mutual funds can be purchased without trading commissions, but in addition to operating expenses they may carry other fees (for example, sales loads or early redemption fees.
What about tax efficiency?
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ETFs
ETFs often generate fewer capital gains for investors since they may have lower turnover and can use the in-kind creation/redemption process to manage the cost basis of their holdings.
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Mutual Funds
A sale of securities within a mutual fund may trigger capital gains for shareholders—even for those who may have an unrealized loss on the overall mutual fund investment.
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Want to learn more?
How to choose ETFs vs. Mutual Funds
ETF or mutual fund? Which is right for you?
That all depends on your goals and the type of investor you are.
Consider an ETF, if:
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You trade actively
Intraday trades, stop orders, limit orders, options, and short selling—all are possible with ETFs, but not with mutual funds.
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You're tax sensitive
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds.
And, in general, ETFs tend to be more tax efficient than index mutual funds.
Consider an index mutual fund, if:
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You invest frequently
If you make regular deposits—for example, you use dollar-cost averaging—a no-load index mutual fund can be a cost-effective option, and it allows you to fully invest the same dollar amount each time (since mutual funds can be purchased in fractional shares).
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Similar ETFs are thinly traded
When you buy or sell ETF shares, the price may be less than the net asset value (or, NAV) of the ETF. This discrepancy (aka: the "bid/ask spread") is often nominal, but for less actively traded ETFs, that might not always be the case.
By contrast, mutual funds always trade at NAV, without any bid/ask spreads.
Consider an actively managed mutual fund, if:
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You're looking for a fund that could potentially beat the market
People invest in actively managed mutual funds in hopes they'll surpass their benchmarks.
Also, actively managed funds acquired as part of a specific strategy may complement index funds in a portfolio, and help to reduce downside risk and mitigate market volatility.
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You're investing in a less efficient market
Some markets are "highly efficient"—which means they’re so popular, there isn't much opportunity to add any real value via active portfolio management.
But in less efficient markets–like high-yield bondsoremerging markets–there may be greater opportunities through active portfolio management.
ETFs and mutual funds, at a glance:
ETFs and mutual funds, at a glance:
ETFs and mutual funds at a glance
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Passive ETFs
Passive ETFs
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Active ETFs
Active ETFs
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Index Mutual Funds Tooltip
Index Mutual Funds Tooltip
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Actively Managed Mutual Funds Tooltip
Actively Managed Mutual Funds Tooltip
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Expense Ratio (OER) Tooltip
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Passive ETFs
Generally lower than actively managed mutual funds.
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Active ETFs
Generally higher than passive ETFs; on par with a mutual fund’s institutional share class.
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Index Mutual Funds Tooltip
Generally lower than actively managed mutual funds.
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Actively Managed Mutual Funds Tooltip
Generally higher than passively managed, index-tracking funds
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Performance
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Passive ETFs
Performance generally seeks to track a benchmark index
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Active ETFs
Performance seeks to outperform a benchmark index.
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Index Mutual Funds Tooltip
Performance seeks to track a benchmark index.
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Actively Managed Mutual Funds Tooltip
Performance seeks to outperform a benchmark index.
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Selection of Funds
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Passive ETFs
About 2,000
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Active ETFs
Over 700 actively managed ETFs and over 45 active semi-transparent ETFs
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Index Mutual Funds Tooltip
About 500*
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Actively Managed Mutual Funds Tooltip
About 7,000*
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Trading
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Passive ETFs
Intraday
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Active ETFs
Intraday
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Index Mutual Funds Tooltip
End of Day
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Actively Managed Mutual Funds Tooltip
End of Day
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Price
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Passive ETFs
Market price Tooltip
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Active ETFs
Market price Tooltip
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Index Mutual Funds Tooltip
NAV (Net Asset Value) Tooltip
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Actively Managed Mutual Funds Tooltip
NAV (Net Asset Value) Tooltip
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Potential Tax Efficiency Tooltip
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Passive ETFs
Most efficient
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Active ETFs
Efficient
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Index Mutual Funds Tooltip
Efficient
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Actively Managed Mutual Funds Tooltip
Less efficient
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Holdings Transparency
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Passive ETFs
Holdings generally reported daily
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Active ETFs
Active semi-transparent ETFs generally report full holdings on a monthly or quarterly basis, whereas actively managed ETFs will report holdings daily
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Index Mutual Funds Tooltip
Holdings generally reported monthly or quarterly
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Actively Managed Mutual Funds Tooltip
Holdings generally reported monthly or quarterly
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*Oldest share classes of funds available in the U.S. as reported by Morningstar Direct, December 2021
ETFs at Schwab
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