ETFs vs. Mutual Funds: Understanding Which is Right for You
Exchange Traded Funds (ETFs) and mutual funds are collections of individual stocks, bonds, commodities, or other funds – or a combination of these.
One ETF or mutual fund can hold hundreds or thousands of individual securities, so diversification can be built in. Here's what you should know about these investment options.
ETFs
Mutual funds
Trades
Trades
ETFs
Trade on exchanges, just like stocks. When you buy an ETF, you buy it from another investor.
Mutual funds
Shares are purchased from a managing company, such as Vanguard or T. Rowe Price.
Management
Management
ETFs
Usually passively managed, automatically tracking a pre-selected index, such as the S&P 500 or the Nasdaq 100, or a commodity such as gold or silver. Passive management usually means lower fees.
Mutual funds
Actively or passively by a professional manager. Active management usually equals higher costs, but in a rough market, an active mutual fund manager can sell off riskier assets to reduce volatility.
Investment Minimums
Investment Minimums
ETFs
Lower investment minimums. You can buy an ETF for the price of one share.
Mutual funds
The minimum initial investment is typically a flat dollar amount.
Capital Gains Taxes
Capital Gains Taxes
ETFs
More tax-efficient. Tracking an index usually doesn't require frequent trading, so you don't have capital gains until you sell.
Mutual funds
More tax-efficient for index funds. Less tax-efficient for actively managed funds because managers constantly rebalance the fund by selling securities. Those sales create capital gains for shareholders.
Taxes on Dividends
Taxes on Dividends
ETFs
0% to 37%. ETF dividends may be "qualified" or treated as ordinary income, depending on how long you've owned the fund. Qualified dividends are taxed anywhere from 0% to 20%. Non-qualified dividends are taxed at ordinary income rates, which range from 10% to 37%.
Mutual funds
0% to 37%. Mutual fund dividends can also be qualified or non-qualified. Qualified dividends are taxed at rates ranging from 0% to 20%, rates on non-qualified dividends range from 10% to 37%.
Consider an
ETF if you want...
Lower Fees
Lower Investment
Minimum
Tax Efficiency
Consider a mutual
fund if you want...
The potential to
outperform the market
Lower-maintenance
investing
Active management
