Mutual funds vs. ETFs: What are the differences?

Both mutual funds and ETFs offer investors pooled investment product options. Mutual funds have more complex structuring than ETFs with varying share classes and fees.

ETFs typically appeal to investors because they track market indexes, mutual funds appeal because they offer a wide selection of actively managed funds. ETFs actively trade throughout the trading day while mutual fund trades close at the end of the trading day.

Mutual funds are actively managed, and ETFs are passively managed investment options.

Which is better mutual funds or ETFs?

ETFs are gaining popularity because they offer low-cost access to investment. Still, there are drawbacks, too, including having shorter operating histories and less extensive tax treatment records than mutual funds.

Active traders favor ETFs because of their low fees, large tax treatment records, and lighter regulation than mutual funds. For example, ETFs that mimic the same index does not necessarily have to hold all the securities in that index, which reduces costs.

However, there are disadvantages too. Since ETF prices change throughout the day, the bid/ask spread discriminates against smaller investors. ETFs also do not automatically stop trading when markets close as mutual funds do.