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ETF vs Mutual Fund

Examining first the similarities between ETFs and mutual funds, investors will see that both pool money together into a collection of securities to diversify risk. Furthermore, they each have fund managers who oversee the portfolio to ensure investment objectives are being met. Both can also track a market index, and they have expense ratios where market participants pay a portion of their investment to the issuing fund company.

Regarding differences, there are six essential things to note: How they are transacted, pricing, investment minimums, commissions, tax considerations and what the future holds for both markets.

How are Mutual Funds & ETFs purchased?

Mutual Funds are purchased directly from a fund company, while ETFs are bought and sold on a market exchange through a broker just as a stock is transacted.

How are both ETFs and Mutual Funds priced?

ETFs fluctuate in price throughout the course of the trading day, just as a stock would. On the other hand, mutual funds are priced once a day at 4:00 PM EST, and the NAV determines the price.

What are the investment minimums for both types of funds?

From an exchange traded fund standpoint, there typically is no minimum. The minimum amount would be the trading price of an ETF. Mutual funds can have ranging investment minimums anywhere from $1K-$5K.

How are trading commissions charged from transactions?

Mutual fund companies tend to not charge a commission for transacting a mutual fund, while ETFs face commissions that the broker charges, typically a standard stock trade.

What are the tax considerations for both Mutual Funds and exchange traded funds?

ETFs usually only face tax implications when an investor sells his or her shares, and mutual funds may face capital gains taxes if cash outflows exceed cash inflows for a mutual fund regardless of whether shares are sold.

What does the future hold for ETFs & Mutual Funds?

According to Citigroup, the $21T mutual fund space can consist of predominantly exchange traded funds within the next ten years. Market participants continue to be enticed by ETFs with their tax advantages and notably lower fees. Per Bloomberg Intelligence data, since the end of December and into 2021, ETFs have attracted +$387B of investor money while mutual funds have only seen +$87B. The largest exchange traded fund from an asset under management standpoint is SPDR S&P 500 Trust ETF (SPY) with AUM of $367B, while the biggest mutual fund is the Vanguard 500 Index Fund Admiral Shares (VFIAX) with AUM of $739B.

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