Edited by 
Edited by 
Reviewed by 
Investors may choose mutual funds over exchange-traded funds (ETFs) based on their investment goals, preferred management style and the types of accounts they use. Mutual funds can offer professional management, broad diversification and access to a wide range of investment strategies and asset classes. They can also make features such as automatic investing and exact-dollar contributions relatively straightforward. While neither mutual funds nor ETFs are inherently better for every investor, understanding their differences can help you decide which may be a better fit for your portfolio. Here are five reasons to consider choosing mutual funds over ETFs.
If you want to build out your investment portfolio, a financial advisor can help you analyze investments while managing risk for your portfolio.
Mutual Funds vs. ETFs: What’s the Difference
While mutual funds and ETFs are both popular types of investments, they differ in several key ways.
Mutual funds are typically actively managed, meaning a fund manager selects the securities to buy and sell in order to achieve the fund’s objectives. You can invest in mutual funds by buying shares directly from the fund company at the end of the trading day, based on the fund’s net asset value (NAV).
ETFs, by comparison, are usually passively managed and aim to track the performance of a specific index. ETFs are traded on stock exchanges throughout the day, allowing investors to buy and sell shares at market prices, similar to individual stocks. This intraday trading feature can offer more flexibility compared to mutual funds. Passive management also means better expense ratios due to lower fees.
On average, however, mutual funds tend to deliver more capital gains for investors than ETFs do.
Mutual Funds vs. ETFs at a Glance
Mutual funds and ETFs both allow investors to pool their money into diversified portfolios of stocks, bonds and other assets, but they differ in how shares are bought and sold, as well as their costs and potential tax implications. Both can also follow active or passive investment strategies. Understanding these differences can help you determine which type of fund may be better suited to your investment goals, account type and investing preferences.
| Feature | Mutual Funds | ETFs |
|---|---|---|
| How they trade | Shares are bought or sold once per day after the market closes | Shares trade throughout the day on stock exchanges |
| Pricing | Transactions occur at the fund’s end-of-day net asset value (NAV) | Market price can fluctuate throughout the trading day |
| Management style | Can be actively or passively managed | Can be actively or passively managed |
| Investment minimums | Some funds require a minimum initial investment | Typically require enough to buy one share, though fractional shares may be available |
| Automatic investing | Commonly available | Availability depends on the brokerage |
| Expense ratios | Vary by fund; actively managed funds often cost more | Vary by fund; many index ETFs have relatively low expenses |
| Tax efficiency | May generate taxable capital gains distributions | Often more tax-efficient due in part to their creation and redemption process |
| Intraday trading | No | Yes |
| Professional management | Available | Available |
| Trading costs | Some funds charge sales loads or other fees | May involve commissions or bid-ask spreads |
Why Choose Mutual Funds Over ETFs
These are five common reasons why to choose mutual funds over ETFs.
1. Professional Management
Mutual funds are typically managed by experienced portfolio managers who actively make investment decisions on behalf of their investors. These managers conduct in-depth research and analysis to select securities that align with the fund’s objectives.
This active management can be particularly appealing to investors who prefer to rely on the expertise of financial professionals rather than making investment decisions themselves.
2. Greater Variety and Range of Funds
Mutual funds often offer a broader variety and range of investment options compared to ETFs. While the ETF market in the United States has exploded over the last 20 years, mutual funds still outnumber ETFs. With thousands of mutual funds available, investors can find funds that cater to specific sectors, regions or investment strategies.
Whether an investor is interested in growth, income or a balanced approach, mutual funds offer diverse options to meet different financial goals.
3. More Customer Service
Investors who value personalized customer service may find mutual funds more appealing. Mutual fund companies often provide dedicated customer support, offering guidance and assistance to investors. This can include help with account management, investment advice and educational resources.
4. Automatic Transactions
Mutual funds also offer the convenience of automatic transactions, which can simplify the investment process. Investors can set up automatic contributions or withdrawals, making it easier to maintain a disciplined investment strategy.
This feature is particularly useful for those who want to regularly invest a fixed amount without having to manually execute each transaction. Automatic transactions can help investors stay committed to their financial plans and potentially benefit from dollar-cost averaging over time.
5. They Trade at Net Asset Value
Unlike ETFs, which trade on exchanges at market prices that can fluctuate throughout the day, mutual funds trade at their net asset value (NAV) at the end of each trading day. This means that investors buy and sell mutual fund shares based on the fund’s NAV, which reflects the value of the underlying assets.
For investors who prefer the stability of knowing they are transacting at the fund’s true value, this can be an appealing feature. Trading at NAV can also reduce the impact of market volatility on the purchase or sale of fund shares.
Costs and Fees: Mutual Funds vs. ETFs
When comparing mutual funds vs. ETFs, it is important to understand how fees and costs can affect your long-term returns. Even small differences in fees can add up over time, so knowing what you’re paying for and why is key to making the right choice for your portfolio.
- Expense ratios: Both mutual funds and ETFs charge an annual fee called an expense ratio, which covers the costs of managing the fund. Actively managed mutual funds tend to have higher expense ratios, often between 0.50% and 1.00% or more, because you are paying for professional managers to research and select investments. ETFs, which are usually passively managed and track an index, typically have much lower expense ratios, sometimes as low as 0.03% to 0.2
- Load fees: Some mutual funds also charge a sales fee, or load fee, which can be assessed when you buy (front-end load) or sell (back-end load) your shares. These can range up to 5.75% of your investment. Many no-load mutual funds are also available, but it is something to watch for. ETFs, on the other hand, do not charge load fees.
- Trading costs: Mutual fund shares are bought and sold directly through the fund company at the fund’s net asset value (NAV) at the end of the day, with no trading commission. ETFs trade on stock exchanges like individual stocks, so you may pay trading fees if your broker does not offer commission-free ETFs.
While mutual funds are generally more expensive, their higher fees may be worth it for investors who value active management and personalized strategies. On the other hand, ETFs are often preferred by cost-conscious investors who want broad market exposure at a low cost.
Mutual Funds vs. ETFs: Which Is More Tax-Efficient?
ETFs are generally considered more tax-efficient than mutual funds when the investments are held in a taxable brokerage account. While investors in either type of fund can owe capital gains taxes when they sell shares for a profit, mutual fund investors may also receive taxable capital gains distributions when a fund manager sells securities within the portfolio.
For example, a mutual fund may sell appreciated stocks to meet investor redemptions or adjust its portfolio. If those sales produce net capital gains, the fund may distribute those gains to its shareholders. An investor could therefore owe taxes on a capital gains distribution even if they did not sell any of their own mutual fund shares.
ETFs can also distribute capital gains, but their structure can make these distributions less common. Many ETFs use an “in-kind” creation and redemption process in which securities can be transferred to authorized participants instead of being sold for cash. This can allow an ETF to remove securities with unrealized gains from its portfolio without triggering the same type of taxable sale within the fund.
However, an ETF isn’t automatically more tax-efficient than every mutual fund. A fund’s investment strategy, portfolio turnover and the types of assets it holds can all affect its tax consequences. Index mutual funds with low turnover, for example, may generate relatively few taxable capital gains.
The distinction also matters less when mutual funds or ETFs are held in tax-advantaged accounts such as a 401(k) or individual retirement account (IRA). Investors generally don’t owe annual taxes on capital gains distributions within these accounts, although taxes may apply to withdrawals depending on the type of retirement account. As a result, investors choosing between a mutual fund and an ETF may want to consider not only potential returns and fees, but also where the investment will be held.
Bottom Line
So, why choose mutual funds over ETFs? There are many reasons investors can choose mutual funds over ETFs. These assets provide access to professional management, where fund managers make strategic investment decisions to enhance returns. Mutual funds also provide a variety of options that allow investors to align their portfolios with specific goals. Additionally, mutual funds can simplify the investment process with customer service and the convenience of automatic transactions.
To determine whether to choose mutual funds or ETFs, consider asking a financial advisor which investment strategy will best suit your long-term objectives.
Investment Planning Tips
- A financial advisor can help you build a personalized investment portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your investment could be worth over time, SmartAsset’s free investment calculator could help you get an estimate.
Photo credit: ©iStock.com/brusinski, ©iStock.com/Milan Markovic