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1. Shard Calculation

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Response:

Calculated Shard: 148 (from laksa155)

2. Crawled Status Check

Query:

curl -X POST \
  'http://laksa148.int.ahrefs:8124/' \
  -H 'Content-Type: text/plain' \
  -H 'X-ClickHouse-Database: crawler3' \
  -H 'Authorization: Basic YXBpOg==' \
  -d 'SELECT getAhrefsURLFromUnparsed(src_unparsed) AS found_url, ifNull(toUnixTimestamp(download_stamp), 0) AS crawl_time, ifNull(toUnixTimestamp(props_url_first_seen), 0) AS first_indexed_time, download_http_code AS http_code, src_unparsed AS src_unparsed, src_root_hash AS src_root_hash, history_drop_reason AS history_drop_reason, meta_title AS meta_title, meta_descriptions AS meta_descriptions, attrs_boilerpipe_text AS attrs_boilerpipe_text, attrs_markdown AS attrs_markdown, attrs_readable_markdown AS attrs_readable_markdown, meta_canonical AS meta_canonical FROM crawler3.page_info_local FINAL PREWHERE (src_root_hash, src_unparsed) IN ((getAhrefsRootHashFromUnparsed(getAhrefsUnparsedNoserviceFromURL(\'https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp\')), getAhrefsUnparsedNoserviceFromURL(\'https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp\'))) FORMAT JSONEachRow'

Response:

{"found_url":"https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp","crawl_time":1776286464,"first_indexed_time":1510383033,"http_code":200,"src_unparsed":"com,investopedia!www,\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp s443","src_root_hash":"7273739457760125548","history_drop_reason":null,"meta_title":"Mutual Funds vs. ETFs: Key Differences and Investment Insights","meta_descriptions":["Explore the key differences between mutual funds and ETFs, including trading, tax efficiency, and management styles, to make informed investment choices."],"attrs_boilerpipe_text":"Mutual Fund vs. ETF: An Overview\nMutual funds and ETFs are popular investment options designed for diversification. While mutual funds are often actively managed with purchases limited to end-of-day\nnet asset value\npricing, ETFs offer intra-day trading flexibility and are typically passively managed. Understanding these and other differences is crucial for selecting the right investment strategy.\nMutual funds have been around for a century. The first mutual fund was\nlaunched\nin 1924. ETFs are relatively new entrants in the investment arena. The first ETF debuted in January 1993: the SPDR S&P 500 ETF Trust (SPY).\nFund managers make decisions about how to allocate assets in a mutual fund so most funds are actively managed. ETFs are usually passively managed. They track market indexes or specific sector indexes. A growing range of actively managed ETFs is available to investors.\nIndex funds are passively managed and usually come with lower fees. They make up a significant proportion of mutual funds' assets under management.\nKey Takeaways\nMutual funds are usually actively managed. Index funds are passively managed and have become more popular.\nETFs are usually passively managed and track a market index or sector sub-index.\nETFs can be bought and sold just like stocks but mutual funds can only be purchased at the end of each trading day.\nActively managed funds tend to have higher fees and higher expense ratios due to their higher operations and trading costs.\nAn open-ended mutual fund has no limit to the number of shares but a closed-ended fund has a fixed number of shares regardless of investor demand.\nGet personalized, AI-powered answers built on 27+ years of trusted expertise.\nUnderstanding Mutual Funds\nMutual funds typically have a higher minimum investment requirement than ETFs. Funds with no minimum investment are available but a typical retail fund requires a\nminimum investment\nof between $500 and $5,000. Minimums can vary depending on the type of fund and company.\nMany mutual funds are\nactively managed\nby a fund manager or team who makes decisions to buy and sell stocks or other securities within that fund to beat the market and help their investors profit. These funds usually come at a higher cost because they require substantially more time, effort, and manpower for securities research and analysis.\nMutual fund purchases and sales occur directly between investors and the fund. The fund's price isn't determined until the end of the\nbusiness day\nwhen\nnet asset value\n(NAV) is determined.\nExploring Types of Mutual Funds\nMutual funds have\ntwo legal classifications\n: open-ended and closed-end. The distinctions between them lie in the fund shares.\nWhat Are Open-Ended Mutual Funds?\nThese funds dominate the mutual fund marketplace in volume and assets under management. The purchase and sale of fund shares take place directly between investors and the fund company. There's no limit to the number of shares the fund can issue. More shares are issued as more investors buy into the fund.\nFederal regulations require a daily valuation process referred to as marking to market. This subsequently adjusts the fund's per-share price to reflect changes in portfolio value. The value of an individual's shares isn't affected by the number of shares outstanding.\nWhat Are Closed-End Mutual Funds?\nClosed-end funds issue only a specific number of shares. They don't issue new shares as investor demand grows.\nPrices aren't determined by the net asset value (NAV) of the fund. They're driven by investor demand. Purchases of shares are often made\nat a premium\nor discount to NAV.\nImportant\nIt's important to factor in the fee structures and tax implications of these investment choices before deciding if and how they fit into your portfolio.\nDelving into Exchange-Traded Funds (ETFs)\nETFs can cost far less for an entry position, as little as the cost of one share\nplus fees or commissions\n. An ETF is created or redeemed in large lots by\ninstitutional investors\nand the shares trade between investors throughout the day like a stock. ETFs can be sold short.\nThese provisions are important to traders and speculators but of little interest to long-term investors. ETFs are priced continuously by the market, however, so there's the potential for trading to take place at a price other than the true NAV. This may introduce an opportunity for\narbitrage\n.\nETFs offer tax advantages to investors. As\npassively managed\nportfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds.\nFast Fact\nThe United States is a significant player in the global market for mutual funds and ETFs, contributing notably to the total worldwide assets in regulated open-end funds.\nHow ETF Creation and Redemption Work\nThe\ncreation\/redemption process\nof ETFs distinguishes them from other investment vehicles and provides several benefits. Creation involves buying all the underlying securities that constitute the ETF and bundling them into the ETF structure. Redemption involves unbundling the ETF back into its individual securities.\nThe ETF creation and redemption process occurs in the\nprimary market\nbetween the\nETF sponsor\nand authorized participants (APs). The APs assemble the securities included in the ETF in their correct weights and deliver those securities to the ETF sponsor.\nFast Fact\nThe sponsor is the ETF issuer and fund manager that administers and markets the ETF. Authorized participants include U.S.-registered broker-dealers who have the right to create and redeem shares of an ETF.\nAn S&P 500 ETF would require that the APs create ETF shares by assembling all the S&P 500 constituent stocks based on their weights in the S&P 500 index and delivering them to the ETF sponsor. The ETF sponsor then bundles these securities into the ETF wrapper and delivers the ETF shares to the APs. ETF share creation is generally done in large increments such as 50,000 shares. The new ETF shares are then listed on the secondary market and traded on an exchange.\nThe ETF redemption process is the opposite of ETF creation. APs aggregate ETF shares known as redemption units in the secondary market and deliver them to the ETF sponsor in exchange for the underlying securities of the ETF.\nAdvantages of Investing in ETFs\nThe unique ETF creation\/redemption process results in ETF prices tracking their net asset value closely because the APs monitor demand for an ETF closely. They act promptly to reduce significant premiums or discounts to the ETF's NAV.\nThe creation\/redemption process also relieves the ETF's fund manager of the responsibility of buying or selling the ETF's underlying securities except when the ETF portfolio has to be rebalanced. An ETF redemption is an \"in kind\" transaction because it involves ETF shares being exchanged for the underlying securities. It's typically tax-exempt and this makes ETFs more tax efficient.\nThe process of creating and redeeming shares of a mutual fund can trigger capital gains tax liabilities for all shareholders of the mutual fund but this is less likely to occur for ETF shareholders who aren't trading shares. The ETF shareholder is still on the hook for capital gains tax when the ETF shares are sold but the investor can choose the timing of such a sale.\nFast Fact\nETFs may be more tax-efficient than mutual funds because of the way they're created and redeemed.\nDifferent Structures of ETFs\nETFs have three structures.\nExchange-Traded Open-End Fund\nThe majority of ETFs are registered under the SEC's\nInvestment Company Act of 1940\nas open-end management companies.\nThis ETF structure has specific diversification requirements. No more than 5% of the portfolio can be invested in securities of a single stock.\nThis structure offers greater portfolio management flexibility compared to the Unit Investment Trust structure because it's not required to fully replicate an index. Several open-end ETFs use optimization or sampling strategies to replicate an index and match its characteristics rather than owning every single constituent security in the index.\nOpen-end funds are also permitted to reinvest dividends in additional securities until distributions are made to shareholders. Securities lending is allowed and derivatives can be used in the fund.\nExchange-Traded Unit Investment Trust (UIT)\nExchange-traded UITs also are governed by the Investment Company Act of 1940 but these must attempt to fully replicate their specific indexes to limit tracking error. They must limit investments in a single issue to 25% or less and set additional weighting limits for diversified and non-diversified funds.\nThe first ETFs such as the SPDR S&P 500 ETF were structured as UITs. They don't automatically reinvest dividends but pay cash dividends quarterly.\nThey're not permitted to engage in securities lending or hold derivatives. Some examples of this structure include the QQQQ and Dow DIAMONDS (DIA).\nExchange-Traded Grantor Trust\nThis is the preferred structure for ETFs that invest in commodities. They're structured as\ngrantor trusts\nwhich are registered under the Securities Act of 1933 but not registered under the Investment Company Act of 1940.\nThis type of ETF bears a strong resemblance to a closed-ended fund but an investor owns the underlying shares in the companies in which the ETF is invested. This includes holding the voting rights associated with being a shareholder. The composition of the fund doesn't change, however. Dividends aren't reinvested but are paid directly to\nshareholders\n. Investors must trade in 100-share lots. Holding company depository receipts (HOLDRs) is one example of this type of ETF.\nMutual Funds vs. ETFs\nMutual Funds\nCan own a variety of securities.\nShares are purchased and sold only with the fund provider.\nOrders only settle after the market closes.\nMinimum investment is usually a flat dollar amount.\nMay be active or passively managed.\nMay be less tax efficient because sales of securities within the fund can generate capital gains.\nETFs\nCan own a variety of securities.\nShares can be traded between investors.\nOrders settle during market hours.\nMinimum investment is typically equal to the price of one share.\nAre usually passively managed.\nMay be more tax-efficient.\nA Detailed Comparison: Mutual Funds vs. ETFs\nMutual funds and ETFs both offer the opportunity to more easily gain exposure to a large number of securities. Both are managed by a fund manager who tries to achieve the stated investment goals of the fund. An S&P 500 mutual fund or ETF typically tries to match the makeup and returns of the S&P 500 index. Investors can buy shares in the fund to get exposure to all the securities that it holds. Fund managers charge a fee called an expense ratio in exchange for managing the fund.\nOne of the key differences between ETFs and mutual funds is in how they're traded. You buy and sell shares directly with the fund provider with mutual funds. Transactions also only occur after trading ends for the day and the fund's manager can calculate the value of a share in the fund.\nETFs trade more like stocks. You can buy and sell shares in an ETF on the open market with other investors. It's also possible to buy or redeem shares with the fund provider but this is less common. Shares trade throughout the day rather than after the market closes so ETFs are a better choice for active traders.\nETFs are often cheaper to invest in as well. Mutual funds typically have minimum investment requirements of hundreds or thousands of dollars. You can invest in an ETF if you have enough money to buy a single share. ETFs are usually passively managed. Some mutual funds have more active management so ETF expense ratios are usually lower.\nMutual Fund vs. ETF Redemption Example\nSuppose an investor redeems $50,000 from a traditional Standard & Poor's 500 Index (S&P 500) fund. The fund must sell $50,000 in stock to pay the investor. The fund captures the capital gain if appreciated stocks are sold to free up the cash for the investor. This is distributed to shareholders before the year's end.\nShareholders pay the taxes for the turnover within the fund as a result. The ETF doesn't sell any stock in the portfolio if an ETF shareholder wants to redeem $50,000. It instead offers shareholders \"in-kind redemptions\" that limit the possibility of paying capital gains tax.\nIs It Better to Invest in the Market Through a Mutual Fund or ETF?\nThe main difference between a mutual fund and an ETF is that an ETF has intra-day liquidity. The ETF might therefore be the better choice if the ability to trade like a stock is an important consideration for you.\nAre ETFs Riskier Than Mutual Funds?\nETFs and mutual funds that otherwise follow the same strategy or track the same index are constructed somewhat differently so there's no reason to believe that one is inherently riskier than the other. The risk of a fund depends largely on its underlying holdings, not the structure of the investment.\nDo Index ETF vs. Mutual Fund Fees Differ Given the Same Passive Strategy?\nThe difference in fees is marginal in many cases. Some of the biggest and most popular S&P 500 ETFs have an \nexpense ratio\nof 0.03%. Vanguard's S&P 500 ETF (VOO) has an expense ratio of 0.03%. The Vanguard 500 Index Fund Admiral Shares (VFIAX) has an expense ratio of 0.04%.\nDo ETFs Pay Dividends?\nYes, many ETFs will pay dividend distributions based on the dividend payments of the stocks that the fund holds.\nHave Index Funds Become More Popular?\nIndex funds track the performance of a market index. They can be formed as either mutual funds or ETFs. These funds have become more popular because they're passively managed and usually come with lower fees. They have lower research and management costs, and this can be passed on to the investor in the form of lower expense ratios.\nThe Bottom Line\nMutual funds and ETFs offer investors diversified exposure to numerous securities, allowing them to spread risk instead of relying on individual company performance. ETFs are typically passively managed, more tax-efficient, and can be traded like stocks throughout the trading day, making them appealing for active traders. Conversely, mutual funds, often actively managed with higher expense ratios, are transacted at a single price after market close. Understanding these key differences and their potential tax implications can help investors choose the right fund type to align with their trading strategies and financial goals.\nInvestopedia does not provide investment advice. 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[Best Life Insurance](https:\/\/www.investopedia.com\/the-best-life-insurance-companies-8763666)\n  - [Best Mortgage Rates](https:\/\/www.investopedia.com\/mortgage-rates-5094943)\n  - [Best Robo-Advisors](https:\/\/www.investopedia.com\/the-best-robo-advisors-8764849)\n  - [Best Personal Loans](https:\/\/www.investopedia.com\/the-best-personal-loans-8761582)\n  - [Best Debt Relief Companies](https:\/\/www.investopedia.com\/the-best-debt-relief-companies-8763179)\n  - [View All](https:\/\/www.investopedia.com\/financial-product-reviews-7110783)\n\nTable of Contents\n\nExpand\n\nTable of Contents\n\n- [An Overview](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-mutual-fund-vs-etf-an-overview)\n- [Understanding Mutual Funds](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-understanding-mutual-funds)\n- [Exploring Types of Mutual Funds](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-exploring-types-of-mutual-funds)\n- [Exchange-Traded Funds](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-delving-into-exchange-traded-funds-etfs)\n- [Different Structures of ETFs](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-different-structures-of-etfs)\n- [Detailed Comparison](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-a-detailed-comparison-mutual-funds-vs-etfs)\n- [Redemption Example](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-mutual-fund-vs-etf-redemption-example)\n- [FAQs](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-is-it-better-to-invest-in-the-market-through-a-mutual-fund-or-etf)\n- [The Bottom Line](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp#toc-the-bottom-line)\n\n# Mutual Funds vs. ETFs: Key Differences and Investment Insights\nBy\n\n[Cathy Pareto](https:\/\/www.investopedia.com\/contributors\/105\/)\n\n![]()\n\n![](https:\/\/www.investopedia.com\/thmb\/1YqtKVBxo1KQfwSuHcZ1Ee0Rg3U=\/200x200\/filters:no_upscale\$\$:max_bytes\$150000\$:strip_icc\$\$\/cathy_suit_photo_for_brochure__miamifinancialadvice-5bfc2624c9e77c005142f52b.jpg)\n\n[Full Bio](https:\/\/www.investopedia.com\/contributors\/105\/)\n\nCathy Pareto, MBA and CFP®, is the founder and president of Cathy Pareto & Associates Inc. For more than twenty years, Cathy has been helping affluent investors pursue their financial goals and objectives.\n\nLearn about our  [editorial policies](https:\/\/www.investopedia.com\/legal-4768893#editorial-policy)\n\nUpdated August 31, 2025\n\nReviewed by [Julius Mansa](https:\/\/www.investopedia.com\/julius-mansa-4799781)\n\nFact checked by\n\n[Yarilet Perez](https:\/\/www.investopedia.com\/yarilet-perez-5078533)\n\n![Yarilet Perez]()\n\n![Yarilet Perez](https:\/\/www.investopedia.com\/thmb\/cEF2qOX7iOQUm6i7wsIW7l6w0qo=\/200x200\/filters:no_upscale\$\$:max_bytes\$150000\$:strip_icc\$\$\/YariletPerez-d2289cb01c3c4f2aabf79ce6057e5078.jpg)\n\nFact checked by Yarilet Perez\n\n[Full Bio](https:\/\/www.investopedia.com\/yarilet-perez-5078533)\n\nYarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.\n\nLearn about our  [editorial policies](https:\/\/www.investopedia.com\/legal-4768893#editorial-policy)\n\nPart of the Series\n\nExchange-Traded Fund Guide for Beginners\n\n[Exchange-Traded Fund (ETF): What It Is and How to Invest](https:\/\/www.investopedia.com\/terms\/e\/etf.asp)\n\nETF Basics\n\n1. [7 Best ETF Trading Strategies for Beginners](https:\/\/www.investopedia.com\/articles\/investing\/090115\/7-best-etf-trading-strategies-beginners.asp)\n2. [Introduction to Exchange-Traded Funds (ETFs)](https:\/\/www.investopedia.com\/articles\/01\/082901.asp)\n3. [7 Easy-to-Understand ETFs to Replace A Savings Account](https:\/\/www.investopedia.com\/financial-edge\/0113\/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx)\n4. [Brief History of ETFs](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/12\/brief-history-exchange-traded-funds.asp)\n5. [ETFs Open Secret as a Tax Loophole](https:\/\/www.investopedia.com\/news\/etf-open-secret-theyre-tax-loophole\/)\n6. [ETF Market Price vs. ETF Net Asset Value: What's the Difference?](https:\/\/www.investopedia.com\/ask\/answers\/052815\/what-difference-between-etfs-net-asset-value-nav-and-its-market-price.asp)\n7. [Going Green With Exchange-Traded Funds (ETFs)](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/11\/going-green-with-etfs.asp)\n8. [How Are ETF Fees Deducted?](https:\/\/www.investopedia.com\/ask\/answers\/071816\/how-are-etf-fees-deducted.asp)\n9. [How are ETFs Taxed?](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-taxes-introduction.asp)\n\nPros and Cons\n\n1. [ETFs Can Be Safe Investments If Used Correctly](https:\/\/www.investopedia.com\/articles\/investing\/020916\/etfs-can-be-safe-investments-if-used-correctly.asp)\n2. [Advantages and Disadvantages of ETFs](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/11\/advantages-disadvantages-etfs.asp)\n3. [Advantages of Exchange-Traded Funds (ETFs)](https:\/\/www.investopedia.com\/ask\/answers\/09\/etfs-vs-mutual-funds.asp)\n4. [Why ETF Investing Is Ideal for Young Investors](https:\/\/www.investopedia.com\/articles\/younginvestors\/09\/etfs-ideal.asp)\n5. [What Are the Biggest Risks When Investing in ETFs?](https:\/\/www.investopedia.com\/articles\/etfs-mutual-funds\/061416\/biggest-etf-risks.asp)\n\nInvesting in ETFs\n\n1. [How To Pick the Best ETF](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-choose-best.asp)\n2. [New Ways to Buy ETFs Online](https:\/\/www.investopedia.com\/articles\/etfs\/071716\/buying-etfs-online-easy-heres-how.asp)\n3. [Dollar-Cost Averaging With ETFs](https:\/\/www.investopedia.com\/articles\/mutualfund\/05\/etfdollarcost.asp)\n4. [Are ETFs a Good Fit for 401(k) Plans?](https:\/\/www.investopedia.com\/articles\/financial-advisors\/101315\/are-etfs-good-fit-401k-plans.asp)\n5. [Exchange Traded Notes: An Alternative to ETFs](https:\/\/www.investopedia.com\/investing\/etfs-vs-etns\/)\n6. [Exchange Traded Product (ETP): Definition, Types, and Example](https:\/\/www.investopedia.com\/terms\/e\/exchange-traded-products-etp.asp)\n7. [Index Fund vs. ETF: What's the Difference?](https:\/\/www.investopedia.com\/ask\/answers\/033015\/whats-difference-between-index-fund-and-etf.asp)\n\nETFs and Mutual Funds\n\n1. [Mutual Fund vs. ETF: What's the Difference?](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp)\n   CURRENT ARTICLE\n2. [ETFs vs. Mutual Funds: Which Is Better for Young Investors?](https:\/\/www.investopedia.com\/articles\/investing\/021916\/etfs-vs-mutual-funds-which-better-young-investors.asp)\n3. [Why Are ETF Fees Lower Than Mutual Fund Fees?](https:\/\/www.investopedia.com\/articles\/investing\/102915\/why-are-etf-fees-lower-mutual-funds.asp)\n\n## Mutual Fund vs. ETF: An Overview\nMutual funds and ETFs are popular investment options designed for diversification. While mutual funds are often actively managed with purchases limited to end-of-day [net asset value](https:\/\/www.investopedia.com\/ask\/answers\/04\/032604.asp) pricing, ETFs offer intra-day trading flexibility and are typically passively managed. Understanding these and other differences is crucial for selecting the right investment strategy.\n\nMutual funds have been around for a century. The first mutual fund was [launched](https:\/\/www.investopedia.com\/articles\/mutualfund\/05\/mfhistory.asp) in 1924. ETFs are relatively new entrants in the investment arena. The first ETF debuted in January 1993: the SPDR S\\&P 500 ETF Trust (SPY).\n\nFund managers make decisions about how to allocate assets in a mutual fund so most funds are actively managed. ETFs are usually passively managed. They track market indexes or specific sector indexes. A growing range of actively managed ETFs is available to investors.\n\nIndex funds are passively managed and usually come with lower fees. They make up a significant proportion of mutual funds' assets under management.\n\n### Key Takeaways\n- Mutual funds are usually actively managed. Index funds are passively managed and have become more popular.\n- ETFs are usually passively managed and track a market index or sector sub-index.\n- ETFs can be bought and sold just like stocks but mutual funds can only be purchased at the end of each trading day.\n- Actively managed funds tend to have higher fees and higher expense ratios due to their higher operations and trading costs.\n- An open-ended mutual fund has no limit to the number of shares but a closed-ended fund has a fixed number of shares regardless of investor demand.\n\nGet personalized, AI-powered answers built on 27+ years of trusted expertise.\n\nASK\n\nClient-Financial Advisor Discussion Guide\n\nETFs vs. Mutual Funds: Which Is Right for Me?\n\n[Download Guide](https:\/\/files.investopedia.com\/Financial+Advisor+Discussion+Guides\/Financial+Advisor+Discussion+Guide+-+ETFs+vs.+Mutual+Funds_+Which+Is+Right+for+Me_.pdf)\n\n[Download Guide](https:\/\/files.investopedia.com\/Financial+Advisor+Discussion+Guides\/Financial+Advisor+Discussion+Guide+-+ETFs+vs.+Mutual+Funds_+Which+Is+Right+for+Me_.pdf)\n## Understanding Mutual Funds\nMutual funds typically have a higher minimum investment requirement than ETFs. Funds with no minimum investment are available but a typical retail fund requires a [minimum investment](https:\/\/www.investopedia.com\/ask\/answers\/111714\/what-minimum-amount-money-i-can-invest-mutual-fund.asp#:~:text=Although%20there%20are%20mutual%20funds,least%20%241%20million%20or%20more.) of between \\$500 and \\$5,000. Minimums can vary depending on the type of fund and company.\n\nMany mutual funds are [actively managed](https:\/\/www.investopedia.com\/articles\/investing\/111115\/5-reasons-choose-mutual-funds-over-etfs.asp) by a fund manager or team who makes decisions to buy and sell stocks or other securities within that fund to beat the market and help their investors profit. These funds usually come at a higher cost because they require substantially more time, effort, and manpower for securities research and analysis.\n\nMutual fund purchases and sales occur directly between investors and the fund. The fund's price isn't determined until the end of the [business day](https:\/\/www.investopedia.com\/terms\/b\/business-day.asp) when [net asset value](https:\/\/www.investopedia.com\/terms\/n\/nav.asp) (NAV) is determined.\n\n## Exploring Types of Mutual Funds\nMutual funds have [two legal classifications](https:\/\/www.investopedia.com\/financial-edge\/0712\/closed-end-vs.-open-end-funds.aspx): open-ended and closed-end. The distinctions between them lie in the fund shares.\n\n### What Are Open-Ended Mutual Funds?\nThese funds dominate the mutual fund marketplace in volume and assets under management. The purchase and sale of fund shares take place directly between investors and the fund company. There's no limit to the number of shares the fund can issue. More shares are issued as more investors buy into the fund.\n\nFederal regulations require a daily valuation process referred to as marking to market. This subsequently adjusts the fund's per-share price to reflect changes in portfolio value. The value of an individual's shares isn't affected by the number of shares outstanding.\n\n### What Are Closed-End Mutual Funds?\nClosed-end funds issue only a specific number of shares. They don't issue new shares as investor demand grows. Prices aren't determined by the net asset value (NAV) of the fund. They're driven by investor demand. Purchases of shares are often made [at a premium](https:\/\/www.investopedia.com\/terms\/a\/at-a-premium.asp) or discount to NAV.\n\n### Important\nIt's important to factor in the fee structures and tax implications of these investment choices before deciding if and how they fit into your portfolio.\n## Delving into Exchange-Traded Funds (ETFs)\nETFs can cost far less for an entry position, as little as the cost of one share [plus fees or commissions](https:\/\/www.investopedia.com\/articles\/investing\/091515\/comparing-etf-gross-vs-net-expense-ratios.asp). An ETF is created or redeemed in large lots by [institutional investors](https:\/\/www.investopedia.com\/terms\/i\/institutionalinvestor.asp) and the shares trade between investors throughout the day like a stock. ETFs can be sold short.\n\nThese provisions are important to traders and speculators but of little interest to long-term investors. ETFs are priced continuously by the market, however, so there's the potential for trading to take place at a price other than the true NAV. This may introduce an opportunity for [arbitrage](https:\/\/www.investopedia.com\/terms\/a\/arbitrage.asp).\n\nETFs offer tax advantages to investors. As [passively managed](https:\/\/www.investopedia.com\/terms\/p\/passivemanagement.asp) portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds.\n\n### Fast Fact\nThe United States is a significant player in the global market for mutual funds and ETFs, contributing notably to the total worldwide assets in regulated open-end funds.\n### How ETF Creation and Redemption Work\nThe [creation\/redemption process](https:\/\/www.investopedia.com\/articles\/mutualfund\/05\/062705.asp) of ETFs distinguishes them from other investment vehicles and provides several benefits. Creation involves buying all the underlying securities that constitute the ETF and bundling them into the ETF structure. Redemption involves unbundling the ETF back into its individual securities.\n\nThe ETF creation and redemption process occurs in the [primary market](https:\/\/www.investopedia.com\/terms\/p\/primarymarket.asp) between the [ETF sponsor](https:\/\/www.investopedia.com\/terms\/e\/etf-sponsor.asp) and authorized participants (APs). The APs assemble the securities included in the ETF in their correct weights and deliver those securities to the ETF sponsor.\n\n### Fast Fact\nThe sponsor is the ETF issuer and fund manager that administers and markets the ETF. Authorized participants include U.S.-registered broker-dealers who have the right to create and redeem shares of an ETF.\n\nAn S\\&P 500 ETF would require that the APs create ETF shares by assembling all the S\\&P 500 constituent stocks based on their weights in the S\\&P 500 index and delivering them to the ETF sponsor. The ETF sponsor then bundles these securities into the ETF wrapper and delivers the ETF shares to the APs. ETF share creation is generally done in large increments such as 50,000 shares. The new ETF shares are then listed on the secondary market and traded on an exchange.\n\nThe ETF redemption process is the opposite of ETF creation. APs aggregate ETF shares known as redemption units in the secondary market and deliver them to the ETF sponsor in exchange for the underlying securities of the ETF.\n\n### Advantages of Investing in ETFs\nThe unique ETF creation\/redemption process results in ETF prices tracking their net asset value closely because the APs monitor demand for an ETF closely. They act promptly to reduce significant premiums or discounts to the ETF's NAV.\n\nThe creation\/redemption process also relieves the ETF's fund manager of the responsibility of buying or selling the ETF's underlying securities except when the ETF portfolio has to be rebalanced. An ETF redemption is an \"in kind\" transaction because it involves ETF shares being exchanged for the underlying securities. It's typically tax-exempt and this makes ETFs more tax efficient.\n\nThe process of creating and redeeming shares of a mutual fund can trigger capital gains tax liabilities for all shareholders of the mutual fund but this is less likely to occur for ETF shareholders who aren't trading shares. The ETF shareholder is still on the hook for capital gains tax when the ETF shares are sold but the investor can choose the timing of such a sale.\n\n### Fast Fact\nETFs may be more tax-efficient than mutual funds because of the way they're created and redeemed.\n## Different Structures of ETFs\nETFs have three structures.\n\n### Exchange-Traded Open-End Fund\nThe majority of ETFs are registered under the SEC's [Investment Company Act of 1940](https:\/\/www.investopedia.com\/terms\/i\/investmentcompanyact.asp) as open-end management companies.\n\nThis ETF structure has specific diversification requirements. No more than 5% of the portfolio can be invested in securities of a single stock. This structure offers greater portfolio management flexibility compared to the Unit Investment Trust structure because it's not required to fully replicate an index. Several open-end ETFs use optimization or sampling strategies to replicate an index and match its characteristics rather than owning every single constituent security in the index.\n\nOpen-end funds are also permitted to reinvest dividends in additional securities until distributions are made to shareholders. Securities lending is allowed and derivatives can be used in the fund.\n\n### Exchange-Traded Unit Investment Trust (UIT)\nExchange-traded UITs also are governed by the Investment Company Act of 1940 but these must attempt to fully replicate their specific indexes to limit tracking error. They must limit investments in a single issue to 25% or less and set additional weighting limits for diversified and non-diversified funds.\n\nThe first ETFs such as the SPDR S\\&P 500 ETF were structured as UITs. They don't automatically reinvest dividends but pay cash dividends quarterly. They're not permitted to engage in securities lending or hold derivatives. Some examples of this structure include the QQQQ and Dow DIAMONDS (DIA).\n\n### Exchange-Traded Grantor Trust\nThis is the preferred structure for ETFs that invest in commodities. They're structured as [grantor trusts](https:\/\/www.investopedia.com\/terms\/g\/grantortrustrules.asp) which are registered under the Securities Act of 1933 but not registered under the Investment Company Act of 1940.\n\nThis type of ETF bears a strong resemblance to a closed-ended fund but an investor owns the underlying shares in the companies in which the ETF is invested. This includes holding the voting rights associated with being a shareholder. The composition of the fund doesn't change, however. Dividends aren't reinvested but are paid directly to [shareholders](https:\/\/www.investopedia.com\/terms\/s\/shareholder.asp). Investors must trade in 100-share lots. Holding company depository receipts (HOLDRs) is one example of this type of ETF.\n\n### Mutual Funds vs. ETFs\nMutual Funds\n\n- Can own a variety of securities.\n- Shares are purchased and sold only with the fund provider.\n- Orders only settle after the market closes.\n- Minimum investment is usually a flat dollar amount.\n- May be active or passively managed.\n- May be less tax efficient because sales of securities within the fund can generate capital gains.\n\nETFs\n\n- Can own a variety of securities.\n- Shares can be traded between investors.\n- Orders settle during market hours.\n- Minimum investment is typically equal to the price of one share.\n- Are usually passively managed.\n- May be more tax-efficient.\n## A Detailed Comparison: Mutual Funds vs. ETFs\nMutual funds and ETFs both offer the opportunity to more easily gain exposure to a large number of securities. Both are managed by a fund manager who tries to achieve the stated investment goals of the fund. An S\\&P 500 mutual fund or ETF typically tries to match the makeup and returns of the S\\&P 500 index. Investors can buy shares in the fund to get exposure to all the securities that it holds. Fund managers charge a fee called an expense ratio in exchange for managing the fund.\n\nOne of the key differences between ETFs and mutual funds is in how they're traded. You buy and sell shares directly with the fund provider with mutual funds. Transactions also only occur after trading ends for the day and the fund's manager can calculate the value of a share in the fund.\n\nETFs trade more like stocks. You can buy and sell shares in an ETF on the open market with other investors. It's also possible to buy or redeem shares with the fund provider but this is less common. Shares trade throughout the day rather than after the market closes so ETFs are a better choice for active traders.\n\nETFs are often cheaper to invest in as well. Mutual funds typically have minimum investment requirements of hundreds or thousands of dollars. You can invest in an ETF if you have enough money to buy a single share. ETFs are usually passively managed. Some mutual funds have more active management so ETF expense ratios are usually lower.\n\n## Mutual Fund vs. ETF Redemption Example\nSuppose an investor redeems \\$50,000 from a traditional Standard & Poor's 500 Index (S\\&P 500) fund. The fund must sell \\$50,000 in stock to pay the investor. The fund captures the capital gain if appreciated stocks are sold to free up the cash for the investor. This is distributed to shareholders before the year's end.\n\nShareholders pay the taxes for the turnover within the fund as a result. The ETF doesn't sell any stock in the portfolio if an ETF shareholder wants to redeem \\$50,000. It instead offers shareholders \"in-kind redemptions\" that limit the possibility of paying capital gains tax.\n\n## Is It Better to Invest in the Market Through a Mutual Fund or ETF?\nThe main difference between a mutual fund and an ETF is that an ETF has intra-day liquidity. The ETF might therefore be the better choice if the ability to trade like a stock is an important consideration for you.\n\n## Are ETFs Riskier Than Mutual Funds?\nETFs and mutual funds that otherwise follow the same strategy or track the same index are constructed somewhat differently so there's no reason to believe that one is inherently riskier than the other. The risk of a fund depends largely on its underlying holdings, not the structure of the investment.\n\n## Do Index ETF vs. Mutual Fund Fees Differ Given the Same Passive Strategy?\nThe difference in fees is marginal in many cases. Some of the biggest and most popular S\\&P 500 ETFs have an [expense ratio](https:\/\/www.investopedia.com\/terms\/e\/expenseratio.asp) of 0.03%. Vanguard's S\\&P 500 ETF (VOO) has an expense ratio of 0.03%. The Vanguard 500 Index Fund Admiral Shares (VFIAX) has an expense ratio of 0.04%.\n\n## Do ETFs Pay Dividends?\nYes, many ETFs will pay dividend distributions based on the dividend payments of the stocks that the fund holds.\n\n## Have Index Funds Become More Popular?\nIndex funds track the performance of a market index. They can be formed as either mutual funds or ETFs. These funds have become more popular because they're passively managed and usually come with lower fees. They have lower research and management costs, and this can be passed on to the investor in the form of lower expense ratios.\n## The Bottom Line\nMutual funds and ETFs offer investors diversified exposure to numerous securities, allowing them to spread risk instead of relying on individual company performance. ETFs are typically passively managed, more tax-efficient, and can be traded like stocks throughout the trading day, making them appealing for active traders. Conversely, mutual funds, often actively managed with higher expense ratios, are transacted at a single price after market close. Understanding these key differences and their potential tax implications can help investors choose the right fund type to align with their trading strategies and financial goals.\n\n*Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.*\n\nGet personalized, AI-powered answers built on 27+ years of trusted expertise.\n\nASK\n\nArticle Sources\n\nInvestopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our [editorial policy.](https:\/\/www.investopedia.com\/legal-4768893#EditorialPolicy)\n\n1. State Street Global Advisors SPDR. \"[SPDR® S\\&P 500® ETF Trust](https:\/\/www.ssga.com\/us\/en\/intermediary\/etfs\/funds\/spdr-sp-500-etf-trust-spy).\"\n2. U.S. Securities and Exchange Commission. \"[Mutual Funds and ETFs: A Guide for Investors](https:\/\/www.sec.gov\/investor\/pubs\/sec-guide-to-mutual-funds.pdf).\" Page 4.\n3. U.S. Securities and Exchange Commission. \"[Mutual Funds and ETFs: A Guide for Investors](https:\/\/www.sec.gov\/investor\/pubs\/sec-guide-to-mutual-funds.pdf).\" Page 5.\n4. Goldman Sachs Asset Management. \"[ETF Tax Efficiency 101](https:\/\/www.gsam.com\/content\/dam\/gsam\/pdfs\/us\/en\/tax-information\/ETF_Tax_Efficiency_101.pdf?sa=n&rd=n#:~:text=capital%20gains.1-,In-Kind%20Redemptions,than%20selling%20securities%20for%20cash.).\" Page 1.\n5. U.S. Securities and Exchange Commission. \"[Investor Bulletin: Exchange-Traded Funds (ETFs)](https:\/\/www.sec.gov\/investor\/alerts\/etfs.pdf).\" Page 1.\n6. U.S. Securities and Exchange Commission. \"[SEC Staff Report to Congress Regarding the Study on Threshold Limits Applicable to Diversified Companies](https:\/\/www.sec.gov\/files\/staff-report-threshold-limits-diversified-funds.pdf).\" Page 4.\n7. Office of the Law Revision Council United States Code. \"[Part I-Regulated Investment Companies](https:\/\/uscode.house.gov\/view.xhtml?path=\/prelim@title26\/subtitleA\/chapter1\/subchapterM\/part1&edition=prelim).\"\n8. U.S Securities and Exchange Commission. \"[Investment Company Registration and Regulation Package](https:\/\/www.sec.gov\/investment\/fast-answers\/divisionsinvestmentinvcoreg121504htm.html).\"\n9. U.S Securities and Exchange Commission. \"[SPDR Exchange Traded Funds - Basics of Product Structure](https:\/\/www.sec.gov\/Archives\/edgar\/data\/1222333\/000119312514287007\/d766507dfwp.htm).\"\n10. U.S. Securities and Exchange Commission. \"[SPDR Exchange Traded Funds](https:\/\/www.sec.gov\/Archives\/edgar\/data\/1222333\/000095012310084263\/y03927fwp.htm).\"\n11. Fidelity. \"[ETF vs. mutual funds: Cost comparison](https:\/\/www.fidelity.com\/learning-center\/investment-products\/etf\/etfs-cost-comparison).\"\n12. Vanguard. \"[VFIAX 500 Index Fund Admiral Shares](https:\/\/advisors.vanguard.com\/investments\/products\/vfiax\/vanguard-500-index-fund-admiral-shares).\"\n13. Vanguard. \"[VOO S\\&P 500 ETF](https:\/\/advisors.vanguard.com\/investments\/products\/voo\/vanguard-sp-500-etf#overview).\"\n\nPart of the Series\n\nExchange-Traded Fund Guide for Beginners\n\n[Exchange-Traded Fund (ETF): What It Is and How to Invest](https:\/\/www.investopedia.com\/terms\/e\/etf.asp)\n\nETF Basics\n\n1. [7 Best ETF Trading Strategies for Beginners](https:\/\/www.investopedia.com\/articles\/investing\/090115\/7-best-etf-trading-strategies-beginners.asp)\n2. [Introduction to Exchange-Traded Funds (ETFs)](https:\/\/www.investopedia.com\/articles\/01\/082901.asp)\n3. [7 Easy-to-Understand ETFs to Replace A Savings Account](https:\/\/www.investopedia.com\/financial-edge\/0113\/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx)\n4. [Brief History of ETFs](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/12\/brief-history-exchange-traded-funds.asp)\n5. [ETFs Open Secret as a Tax Loophole](https:\/\/www.investopedia.com\/news\/etf-open-secret-theyre-tax-loophole\/)\n6. [ETF Market Price vs. ETF Net Asset Value: What's the Difference?](https:\/\/www.investopedia.com\/ask\/answers\/052815\/what-difference-between-etfs-net-asset-value-nav-and-its-market-price.asp)\n7. [Going Green With Exchange-Traded Funds (ETFs)](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/11\/going-green-with-etfs.asp)\n8. [How Are ETF Fees Deducted?](https:\/\/www.investopedia.com\/ask\/answers\/071816\/how-are-etf-fees-deducted.asp)\n9. [How are ETFs Taxed?](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-taxes-introduction.asp)\n\nPros and Cons\n\n1. [ETFs Can Be Safe Investments If Used Correctly](https:\/\/www.investopedia.com\/articles\/investing\/020916\/etfs-can-be-safe-investments-if-used-correctly.asp)\n2. [Advantages and Disadvantages of ETFs](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/11\/advantages-disadvantages-etfs.asp)\n3. [Advantages of Exchange-Traded Funds (ETFs)](https:\/\/www.investopedia.com\/ask\/answers\/09\/etfs-vs-mutual-funds.asp)\n4. [Why ETF Investing Is Ideal for Young Investors](https:\/\/www.investopedia.com\/articles\/younginvestors\/09\/etfs-ideal.asp)\n5. [What Are the Biggest Risks When Investing in ETFs?](https:\/\/www.investopedia.com\/articles\/etfs-mutual-funds\/061416\/biggest-etf-risks.asp)\n\nInvesting in ETFs\n\n1. [How To Pick the Best ETF](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-choose-best.asp)\n2. [New Ways to Buy ETFs Online](https:\/\/www.investopedia.com\/articles\/etfs\/071716\/buying-etfs-online-easy-heres-how.asp)\n3. [Dollar-Cost Averaging With ETFs](https:\/\/www.investopedia.com\/articles\/mutualfund\/05\/etfdollarcost.asp)\n4. [Are ETFs a Good Fit for 401(k) Plans?](https:\/\/www.investopedia.com\/articles\/financial-advisors\/101315\/are-etfs-good-fit-401k-plans.asp)\n5. [Exchange Traded Notes: An Alternative to ETFs](https:\/\/www.investopedia.com\/investing\/etfs-vs-etns\/)\n6. [Exchange Traded Product (ETP): Definition, Types, and Example](https:\/\/www.investopedia.com\/terms\/e\/exchange-traded-products-etp.asp)\n7. [Index Fund vs. ETF: What's the Difference?](https:\/\/www.investopedia.com\/ask\/answers\/033015\/whats-difference-between-index-fund-and-etf.asp)\n\nETFs and Mutual Funds\n\n1. [Mutual Fund vs. ETF: What's the Difference?](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp)\n   CURRENT ARTICLE\n2. [ETFs vs. Mutual Funds: Which Is Better for Young Investors?](https:\/\/www.investopedia.com\/articles\/investing\/021916\/etfs-vs-mutual-funds-which-better-young-investors.asp)\n3. [Why Are ETF Fees Lower Than Mutual Fund Fees?](https:\/\/www.investopedia.com\/articles\/investing\/102915\/why-are-etf-fees-lower-mutual-funds.asp)\n\nRead more\n\n- [Investing](https:\/\/www.investopedia.com\/investing-4427685)\n- [Guide to Mutual Funds](https:\/\/www.investopedia.com\/mutual-funds-4427787)\n\nPartner Links\n\nTake the Next Step to Invest\n\nAdvertiser Disclosure\n\n×\n\nThe offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.\n\n## Related Articles\n[![Selecting high dividend paying stocks is an art and science. By putting together a portfolio of dividend stocks, you can use the regular income to spend or to grow your business.]() ![Selecting high dividend paying stocks is an art and science. 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She has papers in front of her and a pen in her hand. ](https:\/\/www.investopedia.com\/thmb\/psuitmMUcs9GLl2NvTDD6rvYiWc=\/282x188\/filters:no_upscale\$\$:max_bytes\$150000\$:strip_icc\$\$\/GettyImages-2148464304-838ccbb02cc0473eb597e8e4ede1c9e1.jpg) Top 7 ETF Trading Strategies for Beginners](https:\/\/www.investopedia.com\/articles\/investing\/090115\/7-best-etf-trading-strategies-beginners.asp)\n\n[![Two professionals walking and conversing while holding coffee cups American flags and a building facade in the background]() ![Two professionals walking and conversing while holding coffee cups American flags and a building facade in the background](https:\/\/www.investopedia.com\/thmb\/hdgTMeh02s19ZMPHUS2JxkwLTO4=\/282x188\/filters:no_upscale\$\$:max_bytes\$150000\$:strip_icc\$\$\/GettyImages-1767347751-9892d18a263245daa6cbe258b6c652d6.jpg) Avoid ETF Money Traps: Identifying Profitable and Reliable Funds](https:\/\/www.investopedia.com\/are-etfs-money-traps-11760686)\n\n[![Person 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charts](https:\/\/www.investopedia.com\/thmb\/bRyjvM_9QWh7DiIPWXDe-2acEvA=\/282x188\/filters:no_upscale\$\$:max_bytes\$150000\$:strip_icc\$\$\/GettyImages-2204238294-de6b82b31c1e48b1a528fad36de90ec4.jpg) Earn Monthly Income With ETFs—No Options Knowledge Needed](https:\/\/www.investopedia.com\/generate-monthly-income-with-etfs-11740061)\n\n[![A person holding a pen and working with financial documents and a calculator on a table]() ![A person holding a pen and working with financial documents and a calculator on a table](https:\/\/www.investopedia.com\/thmb\/T_ArsHWnYerRBrb4_X2-EQSHIU4=\/282x188\/filters:no_upscale\$\$:max_bytes\$150000\$:strip_icc\$\$\/GettyImages-2067714497-19006575481a467b9e289bcb32b92c0b.jpg) Outperform Wall Street with Low-Cost S\\&P 500 ETFs](https:\/\/www.investopedia.com\/etfs-that-outperform-private-equity-11754858)\n\n[![A woman sits on a couch with a laptop in her lap, looking at financial data on the computer.]() ![A woman sits on a couch with a laptop in her lap, looking at financial data on the computer.](https:\/\/www.investopedia.com\/thmb\/vzoCONKbYHHisUp16Voy6l2Mewg=\/282x188\/filters:no_upscale\$\$:max_bytes\$150000\$:strip_icc\$\$\/GettyImages-1328624054-c4b5167f7be64763a3736ab7e327e1de.jpg) Top Mutual Funds for High Dividend Yields](https:\/\/www.investopedia.com\/highest-dividend-mutual-funds-8709594)\n\n[Investopedia](https:\/\/www.investopedia.com\/)\n\n[Newsletter Sign Up](https:\/\/www.investopedia.com\/articles\/exchangetradedfunds\/08\/etf-mutual-fund-difference.asp)\n\nFollow Us\n\n- [News](https:\/\/www.investopedia.com\/news-4427706)\n- [Investing](https:\/\/www.investopedia.com\/investing-4427685)\n- [Simulator](https:\/\/www.investopedia.com\/simulator\/?inv_to_sim=global_nav)\n- [Banking](https:\/\/www.investopedia.com\/banking-4427754)\n- [Personal Finance](https:\/\/www.investopedia.com\/personal-finance-4427760)\n- [Economy](https:\/\/www.investopedia.com\/economy-4689801)\n- 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[S](https:\/\/www.investopedia.com\/terms-beginning-with-s-4769369)\n- [T](https:\/\/www.investopedia.com\/terms-beginning-with-t-4769370)\n- [U](https:\/\/www.investopedia.com\/terms-beginning-with-u-4769371)\n- [V](https:\/\/www.investopedia.com\/terms-beginning-with-v-4769372)\n- [W](https:\/\/www.investopedia.com\/terms-beginning-with-w-4769373)\n- [X](https:\/\/www.investopedia.com\/terms-beginning-with-x-4769374)\n- [Y](https:\/\/www.investopedia.com\/terms-beginning-with-y-4769375)\n- [Z](https:\/\/www.investopedia.com\/terms-beginning-with-z-4769376)\n\nInvestopedia is part of the [People Inc.](https:\/\/www.people.inc\/) publishing family.\n\nNewsletter Sign Up\n\nNewsletter Sign Up","attrs_readable_markdown":"## Mutual Fund vs. ETF: An Overview\nMutual funds and ETFs are popular investment options designed for diversification. While mutual funds are often actively managed with purchases limited to end-of-day [net asset value](https:\/\/www.investopedia.com\/ask\/answers\/04\/032604.asp) pricing, ETFs offer intra-day trading flexibility and are typically passively managed. Understanding these and other differences is crucial for selecting the right investment strategy.\n\nMutual funds have been around for a century. The first mutual fund was [launched](https:\/\/www.investopedia.com\/articles\/mutualfund\/05\/mfhistory.asp) in 1924. ETFs are relatively new entrants in the investment arena. The first ETF debuted in January 1993: the SPDR S\\&P 500 ETF Trust (SPY).\n\nFund managers make decisions about how to allocate assets in a mutual fund so most funds are actively managed. ETFs are usually passively managed. They track market indexes or specific sector indexes. A growing range of actively managed ETFs is available to investors.\n\nIndex funds are passively managed and usually come with lower fees. They make up a significant proportion of mutual funds' assets under management.\n\n### Key Takeaways\n- Mutual funds are usually actively managed. Index funds are passively managed and have become more popular.\n- ETFs are usually passively managed and track a market index or sector sub-index.\n- ETFs can be bought and sold just like stocks but mutual funds can only be purchased at the end of each trading day.\n- Actively managed funds tend to have higher fees and higher expense ratios due to their higher operations and trading costs.\n- An open-ended mutual fund has no limit to the number of shares but a closed-ended fund has a fixed number of shares regardless of investor demand.\n\nGet personalized, AI-powered answers built on 27+ years of trusted expertise.\n## Understanding Mutual Funds\nMutual funds typically have a higher minimum investment requirement than ETFs. Funds with no minimum investment are available but a typical retail fund requires a [minimum investment](https:\/\/www.investopedia.com\/ask\/answers\/111714\/what-minimum-amount-money-i-can-invest-mutual-fund.asp#:~:text=Although%20there%20are%20mutual%20funds,least%20%241%20million%20or%20more.) of between \\$500 and \\$5,000. Minimums can vary depending on the type of fund and company.\n\nMany mutual funds are [actively managed](https:\/\/www.investopedia.com\/articles\/investing\/111115\/5-reasons-choose-mutual-funds-over-etfs.asp) by a fund manager or team who makes decisions to buy and sell stocks or other securities within that fund to beat the market and help their investors profit. These funds usually come at a higher cost because they require substantially more time, effort, and manpower for securities research and analysis.\n\nMutual fund purchases and sales occur directly between investors and the fund. The fund's price isn't determined until the end of the [business day](https:\/\/www.investopedia.com\/terms\/b\/business-day.asp) when [net asset value](https:\/\/www.investopedia.com\/terms\/n\/nav.asp) (NAV) is determined.\n\n## Exploring Types of Mutual Funds\nMutual funds have [two legal classifications](https:\/\/www.investopedia.com\/financial-edge\/0712\/closed-end-vs.-open-end-funds.aspx): open-ended and closed-end. The distinctions between them lie in the fund shares.\n\n### What Are Open-Ended Mutual Funds?\nThese funds dominate the mutual fund marketplace in volume and assets under management. The purchase and sale of fund shares take place directly between investors and the fund company. There's no limit to the number of shares the fund can issue. More shares are issued as more investors buy into the fund.\n\nFederal regulations require a daily valuation process referred to as marking to market. This subsequently adjusts the fund's per-share price to reflect changes in portfolio value. The value of an individual's shares isn't affected by the number of shares outstanding.\n\n### What Are Closed-End Mutual Funds?\nClosed-end funds issue only a specific number of shares. They don't issue new shares as investor demand grows. Prices aren't determined by the net asset value (NAV) of the fund. They're driven by investor demand. Purchases of shares are often made [at a premium](https:\/\/www.investopedia.com\/terms\/a\/at-a-premium.asp) or discount to NAV.\n\n### Important\nIt's important to factor in the fee structures and tax implications of these investment choices before deciding if and how they fit into your portfolio.\n## Delving into Exchange-Traded Funds (ETFs)\nETFs can cost far less for an entry position, as little as the cost of one share [plus fees or commissions](https:\/\/www.investopedia.com\/articles\/investing\/091515\/comparing-etf-gross-vs-net-expense-ratios.asp). An ETF is created or redeemed in large lots by [institutional investors](https:\/\/www.investopedia.com\/terms\/i\/institutionalinvestor.asp) and the shares trade between investors throughout the day like a stock. ETFs can be sold short.\n\nThese provisions are important to traders and speculators but of little interest to long-term investors. ETFs are priced continuously by the market, however, so there's the potential for trading to take place at a price other than the true NAV. This may introduce an opportunity for [arbitrage](https:\/\/www.investopedia.com\/terms\/a\/arbitrage.asp).\n\nETFs offer tax advantages to investors. As [passively managed](https:\/\/www.investopedia.com\/terms\/p\/passivemanagement.asp) portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds.\n\n### Fast Fact\nThe United States is a significant player in the global market for mutual funds and ETFs, contributing notably to the total worldwide assets in regulated open-end funds.\n### How ETF Creation and Redemption Work\nThe [creation\/redemption process](https:\/\/www.investopedia.com\/articles\/mutualfund\/05\/062705.asp) of ETFs distinguishes them from other investment vehicles and provides several benefits. Creation involves buying all the underlying securities that constitute the ETF and bundling them into the ETF structure. Redemption involves unbundling the ETF back into its individual securities.\n\nThe ETF creation and redemption process occurs in the [primary market](https:\/\/www.investopedia.com\/terms\/p\/primarymarket.asp) between the [ETF sponsor](https:\/\/www.investopedia.com\/terms\/e\/etf-sponsor.asp) and authorized participants (APs). The APs assemble the securities included in the ETF in their correct weights and deliver those securities to the ETF sponsor.\n\n### Fast Fact\nThe sponsor is the ETF issuer and fund manager that administers and markets the ETF. Authorized participants include U.S.-registered broker-dealers who have the right to create and redeem shares of an ETF.\n\nAn S\\&P 500 ETF would require that the APs create ETF shares by assembling all the S\\&P 500 constituent stocks based on their weights in the S\\&P 500 index and delivering them to the ETF sponsor. The ETF sponsor then bundles these securities into the ETF wrapper and delivers the ETF shares to the APs. ETF share creation is generally done in large increments such as 50,000 shares. The new ETF shares are then listed on the secondary market and traded on an exchange.\n\nThe ETF redemption process is the opposite of ETF creation. APs aggregate ETF shares known as redemption units in the secondary market and deliver them to the ETF sponsor in exchange for the underlying securities of the ETF.\n\n### Advantages of Investing in ETFs\nThe unique ETF creation\/redemption process results in ETF prices tracking their net asset value closely because the APs monitor demand for an ETF closely. They act promptly to reduce significant premiums or discounts to the ETF's NAV.\n\nThe creation\/redemption process also relieves the ETF's fund manager of the responsibility of buying or selling the ETF's underlying securities except when the ETF portfolio has to be rebalanced. An ETF redemption is an \"in kind\" transaction because it involves ETF shares being exchanged for the underlying securities. It's typically tax-exempt and this makes ETFs more tax efficient.\n\nThe process of creating and redeeming shares of a mutual fund can trigger capital gains tax liabilities for all shareholders of the mutual fund but this is less likely to occur for ETF shareholders who aren't trading shares. The ETF shareholder is still on the hook for capital gains tax when the ETF shares are sold but the investor can choose the timing of such a sale.\n\n### Fast Fact\nETFs may be more tax-efficient than mutual funds because of the way they're created and redeemed.\n## Different Structures of ETFs\nETFs have three structures.\n\n### Exchange-Traded Open-End Fund\nThe majority of ETFs are registered under the SEC's [Investment Company Act of 1940](https:\/\/www.investopedia.com\/terms\/i\/investmentcompanyact.asp) as open-end management companies.\n\nThis ETF structure has specific diversification requirements. No more than 5% of the portfolio can be invested in securities of a single stock. This structure offers greater portfolio management flexibility compared to the Unit Investment Trust structure because it's not required to fully replicate an index. Several open-end ETFs use optimization or sampling strategies to replicate an index and match its characteristics rather than owning every single constituent security in the index.\n\nOpen-end funds are also permitted to reinvest dividends in additional securities until distributions are made to shareholders. Securities lending is allowed and derivatives can be used in the fund.\n\n### Exchange-Traded Unit Investment Trust (UIT)\nExchange-traded UITs also are governed by the Investment Company Act of 1940 but these must attempt to fully replicate their specific indexes to limit tracking error. They must limit investments in a single issue to 25% or less and set additional weighting limits for diversified and non-diversified funds.\n\nThe first ETFs such as the SPDR S\\&P 500 ETF were structured as UITs. They don't automatically reinvest dividends but pay cash dividends quarterly. They're not permitted to engage in securities lending or hold derivatives. Some examples of this structure include the QQQQ and Dow DIAMONDS (DIA).\n\n### Exchange-Traded Grantor Trust\nThis is the preferred structure for ETFs that invest in commodities. They're structured as [grantor trusts](https:\/\/www.investopedia.com\/terms\/g\/grantortrustrules.asp) which are registered under the Securities Act of 1933 but not registered under the Investment Company Act of 1940.\n\nThis type of ETF bears a strong resemblance to a closed-ended fund but an investor owns the underlying shares in the companies in which the ETF is invested. This includes holding the voting rights associated with being a shareholder. The composition of the fund doesn't change, however. Dividends aren't reinvested but are paid directly to [shareholders](https:\/\/www.investopedia.com\/terms\/s\/shareholder.asp). Investors must trade in 100-share lots. Holding company depository receipts (HOLDRs) is one example of this type of ETF.\n\n### Mutual Funds vs. ETFs\nMutual Funds\n\n- Can own a variety of securities.\n- Shares are purchased and sold only with the fund provider.\n- Orders only settle after the market closes.\n- Minimum investment is usually a flat dollar amount.\n- May be active or passively managed.\n- May be less tax efficient because sales of securities within the fund can generate capital gains.\n\nETFs\n\n- Can own a variety of securities.\n- Shares can be traded between investors.\n- Orders settle during market hours.\n- Minimum investment is typically equal to the price of one share.\n- Are usually passively managed.\n- May be more tax-efficient.\n## A Detailed Comparison: Mutual Funds vs. ETFs\nMutual funds and ETFs both offer the opportunity to more easily gain exposure to a large number of securities. Both are managed by a fund manager who tries to achieve the stated investment goals of the fund. An S\\&P 500 mutual fund or ETF typically tries to match the makeup and returns of the S\\&P 500 index. Investors can buy shares in the fund to get exposure to all the securities that it holds. Fund managers charge a fee called an expense ratio in exchange for managing the fund.\n\nOne of the key differences between ETFs and mutual funds is in how they're traded. You buy and sell shares directly with the fund provider with mutual funds. Transactions also only occur after trading ends for the day and the fund's manager can calculate the value of a share in the fund.\n\nETFs trade more like stocks. You can buy and sell shares in an ETF on the open market with other investors. It's also possible to buy or redeem shares with the fund provider but this is less common. Shares trade throughout the day rather than after the market closes so ETFs are a better choice for active traders.\n\nETFs are often cheaper to invest in as well. Mutual funds typically have minimum investment requirements of hundreds or thousands of dollars. You can invest in an ETF if you have enough money to buy a single share. ETFs are usually passively managed. Some mutual funds have more active management so ETF expense ratios are usually lower.\n\n## Mutual Fund vs. ETF Redemption Example\nSuppose an investor redeems \\$50,000 from a traditional Standard & Poor's 500 Index (S\\&P 500) fund. The fund must sell \\$50,000 in stock to pay the investor. The fund captures the capital gain if appreciated stocks are sold to free up the cash for the investor. This is distributed to shareholders before the year's end.\n\nShareholders pay the taxes for the turnover within the fund as a result. The ETF doesn't sell any stock in the portfolio if an ETF shareholder wants to redeem \\$50,000. It instead offers shareholders \"in-kind redemptions\" that limit the possibility of paying capital gains tax.\n\n## Is It Better to Invest in the Market Through a Mutual Fund or ETF?\nThe main difference between a mutual fund and an ETF is that an ETF has intra-day liquidity. The ETF might therefore be the better choice if the ability to trade like a stock is an important consideration for you.\n\n## Are ETFs Riskier Than Mutual Funds?\nETFs and mutual funds that otherwise follow the same strategy or track the same index are constructed somewhat differently so there's no reason to believe that one is inherently riskier than the other. The risk of a fund depends largely on its underlying holdings, not the structure of the investment.\n\n## Do Index ETF vs. Mutual Fund Fees Differ Given the Same Passive Strategy?\nThe difference in fees is marginal in many cases. Some of the biggest and most popular S\\&P 500 ETFs have an [expense ratio](https:\/\/www.investopedia.com\/terms\/e\/expenseratio.asp) of 0.03%. Vanguard's S\\&P 500 ETF (VOO) has an expense ratio of 0.03%. The Vanguard 500 Index Fund Admiral Shares (VFIAX) has an expense ratio of 0.04%.\n\n## Do ETFs Pay Dividends?\nYes, many ETFs will pay dividend distributions based on the dividend payments of the stocks that the fund holds.\n\n## Have Index Funds Become More Popular?\nIndex funds track the performance of a market index. They can be formed as either mutual funds or ETFs. These funds have become more popular because they're passively managed and usually come with lower fees. They have lower research and management costs, and this can be passed on to the investor in the form of lower expense ratios.\n## The Bottom Line\nMutual funds and ETFs offer investors diversified exposure to numerous securities, allowing them to spread risk instead of relying on individual company performance. ETFs are typically passively managed, more tax-efficient, and can be traded like stocks throughout the trading day, making them appealing for active traders. Conversely, mutual funds, often actively managed with higher expense ratios, are transacted at a single price after market close. Understanding these key differences and their potential tax implications can help investors choose the right fund type to align with their trading strategies and financial goals.\n\n*Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.*","meta_canonical":null}

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Meta Title	Mutual Funds vs. ETFs: Key Differences and Investment Insights
Meta Description	Explore the key differences between mutual funds and ETFs, including trading, tax efficiency, and management styles, to make informed investment choices.
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Boilerpipe Text	Mutual Fund vs. ETF: An Overview Mutual funds and ETFs are popular investment options designed for diversification. While mutual funds are often actively managed with purchases limited to end-of-day net asset value pricing, ETFs offer intra-day trading flexibility and are typically passively managed. Understanding these and other differences is crucial for selecting the right investment strategy. Mutual funds have been around for a century. The first mutual fund was launched in 1924. ETFs are relatively new entrants in the investment arena. The first ETF debuted in January 1993: the SPDR S&P 500 ETF Trust (SPY). Fund managers make decisions about how to allocate assets in a mutual fund so most funds are actively managed. ETFs are usually passively managed. They track market indexes or specific sector indexes. A growing range of actively managed ETFs is available to investors. Index funds are passively managed and usually come with lower fees. They make up a significant proportion of mutual funds' assets under management. Key Takeaways Mutual funds are usually actively managed. Index funds are passively managed and have become more popular. ETFs are usually passively managed and track a market index or sector sub-index. ETFs can be bought and sold just like stocks but mutual funds can only be purchased at the end of each trading day. Actively managed funds tend to have higher fees and higher expense ratios due to their higher operations and trading costs. An open-ended mutual fund has no limit to the number of shares but a closed-ended fund has a fixed number of shares regardless of investor demand. Get personalized, AI-powered answers built on 27+ years of trusted expertise. Understanding Mutual Funds Mutual funds typically have a higher minimum investment requirement than ETFs. Funds with no minimum investment are available but a typical retail fund requires a minimum investment of between $500 and $5,000. Minimums can vary depending on the type of fund and company. Many mutual funds are actively managed by a fund manager or team who makes decisions to buy and sell stocks or other securities within that fund to beat the market and help their investors profit. These funds usually come at a higher cost because they require substantially more time, effort, and manpower for securities research and analysis. Mutual fund purchases and sales occur directly between investors and the fund. The fund's price isn't determined until the end of the business day when net asset value (NAV) is determined. Exploring Types of Mutual Funds Mutual funds have two legal classifications : open-ended and closed-end. The distinctions between them lie in the fund shares. What Are Open-Ended Mutual Funds? These funds dominate the mutual fund marketplace in volume and assets under management. The purchase and sale of fund shares take place directly between investors and the fund company. There's no limit to the number of shares the fund can issue. More shares are issued as more investors buy into the fund. Federal regulations require a daily valuation process referred to as marking to market. This subsequently adjusts the fund's per-share price to reflect changes in portfolio value. The value of an individual's shares isn't affected by the number of shares outstanding. What Are Closed-End Mutual Funds? Closed-end funds issue only a specific number of shares. They don't issue new shares as investor demand grows. Prices aren't determined by the net asset value (NAV) of the fund. They're driven by investor demand. Purchases of shares are often made at a premium or discount to NAV. Important It's important to factor in the fee structures and tax implications of these investment choices before deciding if and how they fit into your portfolio. Delving into Exchange-Traded Funds (ETFs) ETFs can cost far less for an entry position, as little as the cost of one share plus fees or commissions . An ETF is created or redeemed in large lots by institutional investors and the shares trade between investors throughout the day like a stock. ETFs can be sold short. These provisions are important to traders and speculators but of little interest to long-term investors. ETFs are priced continuously by the market, however, so there's the potential for trading to take place at a price other than the true NAV. This may introduce an opportunity for arbitrage . ETFs offer tax advantages to investors. As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds. Fast Fact The United States is a significant player in the global market for mutual funds and ETFs, contributing notably to the total worldwide assets in regulated open-end funds. How ETF Creation and Redemption Work The creation/redemption process of ETFs distinguishes them from other investment vehicles and provides several benefits. Creation involves buying all the underlying securities that constitute the ETF and bundling them into the ETF structure. Redemption involves unbundling the ETF back into its individual securities. The ETF creation and redemption process occurs in the primary market between the ETF sponsor and authorized participants (APs). The APs assemble the securities included in the ETF in their correct weights and deliver those securities to the ETF sponsor. Fast Fact The sponsor is the ETF issuer and fund manager that administers and markets the ETF. Authorized participants include U.S.-registered broker-dealers who have the right to create and redeem shares of an ETF. An S&P 500 ETF would require that the APs create ETF shares by assembling all the S&P 500 constituent stocks based on their weights in the S&P 500 index and delivering them to the ETF sponsor. The ETF sponsor then bundles these securities into the ETF wrapper and delivers the ETF shares to the APs. ETF share creation is generally done in large increments such as 50,000 shares. The new ETF shares are then listed on the secondary market and traded on an exchange. The ETF redemption process is the opposite of ETF creation. APs aggregate ETF shares known as redemption units in the secondary market and deliver them to the ETF sponsor in exchange for the underlying securities of the ETF. Advantages of Investing in ETFs The unique ETF creation/redemption process results in ETF prices tracking their net asset value closely because the APs monitor demand for an ETF closely. They act promptly to reduce significant premiums or discounts to the ETF's NAV. The creation/redemption process also relieves the ETF's fund manager of the responsibility of buying or selling the ETF's underlying securities except when the ETF portfolio has to be rebalanced. An ETF redemption is an "in kind" transaction because it involves ETF shares being exchanged for the underlying securities. It's typically tax-exempt and this makes ETFs more tax efficient. The process of creating and redeeming shares of a mutual fund can trigger capital gains tax liabilities for all shareholders of the mutual fund but this is less likely to occur for ETF shareholders who aren't trading shares. The ETF shareholder is still on the hook for capital gains tax when the ETF shares are sold but the investor can choose the timing of such a sale. Fast Fact ETFs may be more tax-efficient than mutual funds because of the way they're created and redeemed. Different Structures of ETFs ETFs have three structures. Exchange-Traded Open-End Fund The majority of ETFs are registered under the SEC's Investment Company Act of 1940 as open-end management companies. This ETF structure has specific diversification requirements. No more than 5% of the portfolio can be invested in securities of a single stock. This structure offers greater portfolio management flexibility compared to the Unit Investment Trust structure because it's not required to fully replicate an index. Several open-end ETFs use optimization or sampling strategies to replicate an index and match its characteristics rather than owning every single constituent security in the index. Open-end funds are also permitted to reinvest dividends in additional securities until distributions are made to shareholders. Securities lending is allowed and derivatives can be used in the fund. Exchange-Traded Unit Investment Trust (UIT) Exchange-traded UITs also are governed by the Investment Company Act of 1940 but these must attempt to fully replicate their specific indexes to limit tracking error. They must limit investments in a single issue to 25% or less and set additional weighting limits for diversified and non-diversified funds. The first ETFs such as the SPDR S&P 500 ETF were structured as UITs. They don't automatically reinvest dividends but pay cash dividends quarterly. They're not permitted to engage in securities lending or hold derivatives. Some examples of this structure include the QQQQ and Dow DIAMONDS (DIA). Exchange-Traded Grantor Trust This is the preferred structure for ETFs that invest in commodities. They're structured as grantor trusts which are registered under the Securities Act of 1933 but not registered under the Investment Company Act of 1940. This type of ETF bears a strong resemblance to a closed-ended fund but an investor owns the underlying shares in the companies in which the ETF is invested. This includes holding the voting rights associated with being a shareholder. The composition of the fund doesn't change, however. Dividends aren't reinvested but are paid directly to shareholders . Investors must trade in 100-share lots. Holding company depository receipts (HOLDRs) is one example of this type of ETF. Mutual Funds vs. ETFs Mutual Funds Can own a variety of securities. Shares are purchased and sold only with the fund provider. Orders only settle after the market closes. Minimum investment is usually a flat dollar amount. May be active or passively managed. May be less tax efficient because sales of securities within the fund can generate capital gains. ETFs Can own a variety of securities. Shares can be traded between investors. Orders settle during market hours. Minimum investment is typically equal to the price of one share. Are usually passively managed. May be more tax-efficient. A Detailed Comparison: Mutual Funds vs. ETFs Mutual funds and ETFs both offer the opportunity to more easily gain exposure to a large number of securities. Both are managed by a fund manager who tries to achieve the stated investment goals of the fund. An S&P 500 mutual fund or ETF typically tries to match the makeup and returns of the S&P 500 index. Investors can buy shares in the fund to get exposure to all the securities that it holds. Fund managers charge a fee called an expense ratio in exchange for managing the fund. One of the key differences between ETFs and mutual funds is in how they're traded. You buy and sell shares directly with the fund provider with mutual funds. Transactions also only occur after trading ends for the day and the fund's manager can calculate the value of a share in the fund. ETFs trade more like stocks. You can buy and sell shares in an ETF on the open market with other investors. It's also possible to buy or redeem shares with the fund provider but this is less common. Shares trade throughout the day rather than after the market closes so ETFs are a better choice for active traders. ETFs are often cheaper to invest in as well. Mutual funds typically have minimum investment requirements of hundreds or thousands of dollars. You can invest in an ETF if you have enough money to buy a single share. ETFs are usually passively managed. Some mutual funds have more active management so ETF expense ratios are usually lower. Mutual Fund vs. ETF Redemption Example Suppose an investor redeems $50,000 from a traditional Standard & Poor's 500 Index (S&P 500) fund. The fund must sell $50,000 in stock to pay the investor. The fund captures the capital gain if appreciated stocks are sold to free up the cash for the investor. This is distributed to shareholders before the year's end. Shareholders pay the taxes for the turnover within the fund as a result. The ETF doesn't sell any stock in the portfolio if an ETF shareholder wants to redeem $50,000. It instead offers shareholders "in-kind redemptions" that limit the possibility of paying capital gains tax. Is It Better to Invest in the Market Through a Mutual Fund or ETF? The main difference between a mutual fund and an ETF is that an ETF has intra-day liquidity. The ETF might therefore be the better choice if the ability to trade like a stock is an important consideration for you. Are ETFs Riskier Than Mutual Funds? ETFs and mutual funds that otherwise follow the same strategy or track the same index are constructed somewhat differently so there's no reason to believe that one is inherently riskier than the other. The risk of a fund depends largely on its underlying holdings, not the structure of the investment. Do Index ETF vs. Mutual Fund Fees Differ Given the Same Passive Strategy? The difference in fees is marginal in many cases. Some of the biggest and most popular S&P 500 ETFs have an expense ratio of 0.03%. Vanguard's S&P 500 ETF (VOO) has an expense ratio of 0.03%. The Vanguard 500 Index Fund Admiral Shares (VFIAX) has an expense ratio of 0.04%. Do ETFs Pay Dividends? Yes, many ETFs will pay dividend distributions based on the dividend payments of the stocks that the fund holds. Have Index Funds Become More Popular? Index funds track the performance of a market index. They can be formed as either mutual funds or ETFs. These funds have become more popular because they're passively managed and usually come with lower fees. They have lower research and management costs, and this can be passed on to the investor in the form of lower expense ratios. The Bottom Line Mutual funds and ETFs offer investors diversified exposure to numerous securities, allowing them to spread risk instead of relying on individual company performance. ETFs are typically passively managed, more tax-efficient, and can be traded like stocks throughout the trading day, making them appealing for active traders. Conversely, mutual funds, often actively managed with higher expense ratios, are transacted at a single price after market close. Understanding these key differences and their potential tax implications can help investors choose the right fund type to align with their trading strategies and financial goals. Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.
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[Exchange-Traded Funds](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp#toc-delving-into-exchange-traded-funds-etfs) - [Different Structures of ETFs](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp#toc-different-structures-of-etfs) - [Detailed Comparison](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp#toc-a-detailed-comparison-mutual-funds-vs-etfs) - [Redemption Example](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp#toc-mutual-fund-vs-etf-redemption-example) - [FAQs](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp#toc-is-it-better-to-invest-in-the-market-through-a-mutual-fund-or-etf) - [The Bottom Line](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp#toc-the-bottom-line) # Mutual Funds vs. ETFs: Key Differences and Investment Insights By [Cathy Pareto](https://www.investopedia.com/contributors/105/) ![]() ![](https://www.investopedia.com/thmb/1YqtKVBxo1KQfwSuHcZ1Ee0Rg3U=/200x200/filters:no_upscale:max_bytes$150000$:strip_icc/cathy_suit_photo_for_brochure__miamifinancialadvice-5bfc2624c9e77c005142f52b.jpg) [Full Bio](https://www.investopedia.com/contributors/105/) Cathy Pareto, MBA and CFP®, is the founder and president of Cathy Pareto & Associates Inc. For more than twenty years, Cathy has been helping affluent investors pursue their financial goals and objectives. Learn about our [editorial policies](https://www.investopedia.com/legal-4768893#editorial-policy) Updated August 31, 2025 Reviewed by [Julius Mansa](https://www.investopedia.com/julius-mansa-4799781) Fact checked by [Yarilet Perez](https://www.investopedia.com/yarilet-perez-5078533) ![Yarilet Perez]() ![Yarilet Perez](https://www.investopedia.com/thmb/cEF2qOX7iOQUm6i7wsIW7l6w0qo=/200x200/filters:no_upscale:max_bytes$150000$:strip_icc/YariletPerez-d2289cb01c3c4f2aabf79ce6057e5078.jpg) Fact checked by Yarilet Perez [Full Bio](https://www.investopedia.com/yarilet-perez-5078533) Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate. Learn about our [editorial policies](https://www.investopedia.com/legal-4768893#editorial-policy) Part of the Series Exchange-Traded Fund Guide for Beginners [Exchange-Traded Fund (ETF): What It Is and How to Invest](https://www.investopedia.com/terms/e/etf.asp) ETF Basics 1. [7 Best ETF Trading Strategies for Beginners](https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp) 2. [Introduction to Exchange-Traded Funds (ETFs)](https://www.investopedia.com/articles/01/082901.asp) 3. [7 Easy-to-Understand ETFs to Replace A Savings Account](https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx) 4. [Brief History of ETFs](https://www.investopedia.com/articles/exchangetradedfunds/12/brief-history-exchange-traded-funds.asp) 5. [ETFs Open Secret as a Tax Loophole](https://www.investopedia.com/news/etf-open-secret-theyre-tax-loophole/) 6. [ETF Market Price vs. ETF Net Asset Value: What's the Difference?](https://www.investopedia.com/ask/answers/052815/what-difference-between-etfs-net-asset-value-nav-and-its-market-price.asp) 7. [Going Green With Exchange-Traded Funds (ETFs)](https://www.investopedia.com/articles/exchangetradedfunds/11/going-green-with-etfs.asp) 8. [How Are ETF Fees Deducted?](https://www.investopedia.com/ask/answers/071816/how-are-etf-fees-deducted.asp) 9. [How are ETFs Taxed?](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp) Pros and Cons 1. [ETFs Can Be Safe Investments If Used Correctly](https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp) 2. [Advantages and Disadvantages of ETFs](https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp) 3. [Advantages of Exchange-Traded Funds (ETFs)](https://www.investopedia.com/ask/answers/09/etfs-vs-mutual-funds.asp) 4. [Why ETF Investing Is Ideal for Young Investors](https://www.investopedia.com/articles/younginvestors/09/etfs-ideal.asp) 5. [What Are the Biggest Risks When Investing in ETFs?](https://www.investopedia.com/articles/etfs-mutual-funds/061416/biggest-etf-risks.asp) Investing in ETFs 1. [How To Pick the Best ETF](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-choose-best.asp) 2. [New Ways to Buy ETFs Online](https://www.investopedia.com/articles/etfs/071716/buying-etfs-online-easy-heres-how.asp) 3. [Dollar-Cost Averaging With ETFs](https://www.investopedia.com/articles/mutualfund/05/etfdollarcost.asp) 4. [Are ETFs a Good Fit for 401(k) Plans?](https://www.investopedia.com/articles/financial-advisors/101315/are-etfs-good-fit-401k-plans.asp) 5. [Exchange Traded Notes: An Alternative to ETFs](https://www.investopedia.com/investing/etfs-vs-etns/) 6. [Exchange Traded Product (ETP): Definition, Types, and Example](https://www.investopedia.com/terms/e/exchange-traded-products-etp.asp) 7. [Index Fund vs. ETF: What's the Difference?](https://www.investopedia.com/ask/answers/033015/whats-difference-between-index-fund-and-etf.asp) ETFs and Mutual Funds 1. [Mutual Fund vs. ETF: What's the Difference?](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp) CURRENT ARTICLE 2. [ETFs vs. Mutual Funds: Which Is Better for Young Investors?](https://www.investopedia.com/articles/investing/021916/etfs-vs-mutual-funds-which-better-young-investors.asp) 3. [Why Are ETF Fees Lower Than Mutual Fund Fees?](https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp) ## Mutual Fund vs. ETF: An Overview Mutual funds and ETFs are popular investment options designed for diversification. While mutual funds are often actively managed with purchases limited to end-of-day [net asset value](https://www.investopedia.com/ask/answers/04/032604.asp) pricing, ETFs offer intra-day trading flexibility and are typically passively managed. Understanding these and other differences is crucial for selecting the right investment strategy. Mutual funds have been around for a century. The first mutual fund was [launched](https://www.investopedia.com/articles/mutualfund/05/mfhistory.asp) in 1924. ETFs are relatively new entrants in the investment arena. The first ETF debuted in January 1993: the SPDR S\&P 500 ETF Trust (SPY). Fund managers make decisions about how to allocate assets in a mutual fund so most funds are actively managed. ETFs are usually passively managed. They track market indexes or specific sector indexes. A growing range of actively managed ETFs is available to investors. Index funds are passively managed and usually come with lower fees. They make up a significant proportion of mutual funds' assets under management. ### Key Takeaways - Mutual funds are usually actively managed. Index funds are passively managed and have become more popular. - ETFs are usually passively managed and track a market index or sector sub-index. - ETFs can be bought and sold just like stocks but mutual funds can only be purchased at the end of each trading day. - Actively managed funds tend to have higher fees and higher expense ratios due to their higher operations and trading costs. - An open-ended mutual fund has no limit to the number of shares but a closed-ended fund has a fixed number of shares regardless of investor demand. Get personalized, AI-powered answers built on 27+ years of trusted expertise. ASK Client-Financial Advisor Discussion Guide ETFs vs. Mutual Funds: Which Is Right for Me? [Download Guide](https://files.investopedia.com/Financial+Advisor+Discussion+Guides/Financial+Advisor+Discussion+Guide+-+ETFs+vs.+Mutual+Funds_+Which+Is+Right+for+Me_.pdf) [Download Guide](https://files.investopedia.com/Financial+Advisor+Discussion+Guides/Financial+Advisor+Discussion+Guide+-+ETFs+vs.+Mutual+Funds_+Which+Is+Right+for+Me_.pdf) ## Understanding Mutual Funds Mutual funds typically have a higher minimum investment requirement than ETFs. Funds with no minimum investment are available but a typical retail fund requires a [minimum investment](https://www.investopedia.com/ask/answers/111714/what-minimum-amount-money-i-can-invest-mutual-fund.asp#:~:text=Although%20there%20are%20mutual%20funds,least%20%241%20million%20or%20more.) of between \$500 and \$5,000. Minimums can vary depending on the type of fund and company. Many mutual funds are [actively managed](https://www.investopedia.com/articles/investing/111115/5-reasons-choose-mutual-funds-over-etfs.asp) by a fund manager or team who makes decisions to buy and sell stocks or other securities within that fund to beat the market and help their investors profit. These funds usually come at a higher cost because they require substantially more time, effort, and manpower for securities research and analysis. Mutual fund purchases and sales occur directly between investors and the fund. The fund's price isn't determined until the end of the [business day](https://www.investopedia.com/terms/b/business-day.asp) when [net asset value](https://www.investopedia.com/terms/n/nav.asp) (NAV) is determined. ## Exploring Types of Mutual Funds Mutual funds have [two legal classifications](https://www.investopedia.com/financial-edge/0712/closed-end-vs.-open-end-funds.aspx): open-ended and closed-end. The distinctions between them lie in the fund shares. ### What Are Open-Ended Mutual Funds? These funds dominate the mutual fund marketplace in volume and assets under management. The purchase and sale of fund shares take place directly between investors and the fund company. There's no limit to the number of shares the fund can issue. More shares are issued as more investors buy into the fund. Federal regulations require a daily valuation process referred to as marking to market. This subsequently adjusts the fund's per-share price to reflect changes in portfolio value. The value of an individual's shares isn't affected by the number of shares outstanding. ### What Are Closed-End Mutual Funds? Closed-end funds issue only a specific number of shares. They don't issue new shares as investor demand grows. Prices aren't determined by the net asset value (NAV) of the fund. They're driven by investor demand. Purchases of shares are often made [at a premium](https://www.investopedia.com/terms/a/at-a-premium.asp) or discount to NAV. ### Important It's important to factor in the fee structures and tax implications of these investment choices before deciding if and how they fit into your portfolio. ## Delving into Exchange-Traded Funds (ETFs) ETFs can cost far less for an entry position, as little as the cost of one share [plus fees or commissions](https://www.investopedia.com/articles/investing/091515/comparing-etf-gross-vs-net-expense-ratios.asp). An ETF is created or redeemed in large lots by [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) and the shares trade between investors throughout the day like a stock. ETFs can be sold short. These provisions are important to traders and speculators but of little interest to long-term investors. ETFs are priced continuously by the market, however, so there's the potential for trading to take place at a price other than the true NAV. This may introduce an opportunity for [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp). ETFs offer tax advantages to investors. As [passively managed](https://www.investopedia.com/terms/p/passivemanagement.asp) portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds. ### Fast Fact The United States is a significant player in the global market for mutual funds and ETFs, contributing notably to the total worldwide assets in regulated open-end funds. ### How ETF Creation and Redemption Work The [creation/redemption process](https://www.investopedia.com/articles/mutualfund/05/062705.asp) of ETFs distinguishes them from other investment vehicles and provides several benefits. Creation involves buying all the underlying securities that constitute the ETF and bundling them into the ETF structure. Redemption involves unbundling the ETF back into its individual securities. The ETF creation and redemption process occurs in the [primary market](https://www.investopedia.com/terms/p/primarymarket.asp) between the [ETF sponsor](https://www.investopedia.com/terms/e/etf-sponsor.asp) and authorized participants (APs). The APs assemble the securities included in the ETF in their correct weights and deliver those securities to the ETF sponsor. ### Fast Fact The sponsor is the ETF issuer and fund manager that administers and markets the ETF. Authorized participants include U.S.-registered broker-dealers who have the right to create and redeem shares of an ETF. An S\&P 500 ETF would require that the APs create ETF shares by assembling all the S\&P 500 constituent stocks based on their weights in the S\&P 500 index and delivering them to the ETF sponsor. The ETF sponsor then bundles these securities into the ETF wrapper and delivers the ETF shares to the APs. ETF share creation is generally done in large increments such as 50,000 shares. The new ETF shares are then listed on the secondary market and traded on an exchange. The ETF redemption process is the opposite of ETF creation. APs aggregate ETF shares known as redemption units in the secondary market and deliver them to the ETF sponsor in exchange for the underlying securities of the ETF. ### Advantages of Investing in ETFs The unique ETF creation/redemption process results in ETF prices tracking their net asset value closely because the APs monitor demand for an ETF closely. They act promptly to reduce significant premiums or discounts to the ETF's NAV. The creation/redemption process also relieves the ETF's fund manager of the responsibility of buying or selling the ETF's underlying securities except when the ETF portfolio has to be rebalanced. An ETF redemption is an "in kind" transaction because it involves ETF shares being exchanged for the underlying securities. It's typically tax-exempt and this makes ETFs more tax efficient. The process of creating and redeeming shares of a mutual fund can trigger capital gains tax liabilities for all shareholders of the mutual fund but this is less likely to occur for ETF shareholders who aren't trading shares. The ETF shareholder is still on the hook for capital gains tax when the ETF shares are sold but the investor can choose the timing of such a sale. ### Fast Fact ETFs may be more tax-efficient than mutual funds because of the way they're created and redeemed. ## Different Structures of ETFs ETFs have three structures. ### Exchange-Traded Open-End Fund The majority of ETFs are registered under the SEC's [Investment Company Act of 1940](https://www.investopedia.com/terms/i/investmentcompanyact.asp) as open-end management companies. This ETF structure has specific diversification requirements. No more than 5% of the portfolio can be invested in securities of a single stock. This structure offers greater portfolio management flexibility compared to the Unit Investment Trust structure because it's not required to fully replicate an index. Several open-end ETFs use optimization or sampling strategies to replicate an index and match its characteristics rather than owning every single constituent security in the index. Open-end funds are also permitted to reinvest dividends in additional securities until distributions are made to shareholders. Securities lending is allowed and derivatives can be used in the fund. ### Exchange-Traded Unit Investment Trust (UIT) Exchange-traded UITs also are governed by the Investment Company Act of 1940 but these must attempt to fully replicate their specific indexes to limit tracking error. They must limit investments in a single issue to 25% or less and set additional weighting limits for diversified and non-diversified funds. The first ETFs such as the SPDR S\&P 500 ETF were structured as UITs. They don't automatically reinvest dividends but pay cash dividends quarterly. They're not permitted to engage in securities lending or hold derivatives. Some examples of this structure include the QQQQ and Dow DIAMONDS (DIA). ### Exchange-Traded Grantor Trust This is the preferred structure for ETFs that invest in commodities. They're structured as [grantor trusts](https://www.investopedia.com/terms/g/grantortrustrules.asp) which are registered under the Securities Act of 1933 but not registered under the Investment Company Act of 1940. This type of ETF bears a strong resemblance to a closed-ended fund but an investor owns the underlying shares in the companies in which the ETF is invested. This includes holding the voting rights associated with being a shareholder. The composition of the fund doesn't change, however. Dividends aren't reinvested but are paid directly to [shareholders](https://www.investopedia.com/terms/s/shareholder.asp). Investors must trade in 100-share lots. Holding company depository receipts (HOLDRs) is one example of this type of ETF. ### Mutual Funds vs. ETFs Mutual Funds - Can own a variety of securities. - Shares are purchased and sold only with the fund provider. - Orders only settle after the market closes. - Minimum investment is usually a flat dollar amount. - May be active or passively managed. - May be less tax efficient because sales of securities within the fund can generate capital gains. ETFs - Can own a variety of securities. - Shares can be traded between investors. - Orders settle during market hours. - Minimum investment is typically equal to the price of one share. - Are usually passively managed. - May be more tax-efficient. ## A Detailed Comparison: Mutual Funds vs. ETFs Mutual funds and ETFs both offer the opportunity to more easily gain exposure to a large number of securities. Both are managed by a fund manager who tries to achieve the stated investment goals of the fund. An S\&P 500 mutual fund or ETF typically tries to match the makeup and returns of the S\&P 500 index. Investors can buy shares in the fund to get exposure to all the securities that it holds. Fund managers charge a fee called an expense ratio in exchange for managing the fund. One of the key differences between ETFs and mutual funds is in how they're traded. You buy and sell shares directly with the fund provider with mutual funds. Transactions also only occur after trading ends for the day and the fund's manager can calculate the value of a share in the fund. ETFs trade more like stocks. You can buy and sell shares in an ETF on the open market with other investors. It's also possible to buy or redeem shares with the fund provider but this is less common. Shares trade throughout the day rather than after the market closes so ETFs are a better choice for active traders. ETFs are often cheaper to invest in as well. Mutual funds typically have minimum investment requirements of hundreds or thousands of dollars. You can invest in an ETF if you have enough money to buy a single share. ETFs are usually passively managed. Some mutual funds have more active management so ETF expense ratios are usually lower. ## Mutual Fund vs. ETF Redemption Example Suppose an investor redeems \$50,000 from a traditional Standard & Poor's 500 Index (S\&P 500) fund. The fund must sell \$50,000 in stock to pay the investor. The fund captures the capital gain if appreciated stocks are sold to free up the cash for the investor. This is distributed to shareholders before the year's end. Shareholders pay the taxes for the turnover within the fund as a result. The ETF doesn't sell any stock in the portfolio if an ETF shareholder wants to redeem \$50,000. It instead offers shareholders "in-kind redemptions" that limit the possibility of paying capital gains tax. ## Is It Better to Invest in the Market Through a Mutual Fund or ETF? The main difference between a mutual fund and an ETF is that an ETF has intra-day liquidity. The ETF might therefore be the better choice if the ability to trade like a stock is an important consideration for you. ## Are ETFs Riskier Than Mutual Funds? ETFs and mutual funds that otherwise follow the same strategy or track the same index are constructed somewhat differently so there's no reason to believe that one is inherently riskier than the other. The risk of a fund depends largely on its underlying holdings, not the structure of the investment. ## Do Index ETF vs. Mutual Fund Fees Differ Given the Same Passive Strategy? The difference in fees is marginal in many cases. Some of the biggest and most popular S\&P 500 ETFs have an [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp) of 0.03%. Vanguard's S\&P 500 ETF (VOO) has an expense ratio of 0.03%. The Vanguard 500 Index Fund Admiral Shares (VFIAX) has an expense ratio of 0.04%. ## Do ETFs Pay Dividends? Yes, many ETFs will pay dividend distributions based on the dividend payments of the stocks that the fund holds. ## Have Index Funds Become More Popular? Index funds track the performance of a market index. They can be formed as either mutual funds or ETFs. These funds have become more popular because they're passively managed and usually come with lower fees. They have lower research and management costs, and this can be passed on to the investor in the form of lower expense ratios. ## The Bottom Line Mutual funds and ETFs offer investors diversified exposure to numerous securities, allowing them to spread risk instead of relying on individual company performance. ETFs are typically passively managed, more tax-efficient, and can be traded like stocks throughout the trading day, making them appealing for active traders. Conversely, mutual funds, often actively managed with higher expense ratios, are transacted at a single price after market close. Understanding these key differences and their potential tax implications can help investors choose the right fund type to align with their trading strategies and financial goals. Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions. Get personalized, AI-powered answers built on 27+ years of trusted expertise. ASK Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our [editorial policy.](https://www.investopedia.com/legal-4768893#EditorialPolicy) 1. State Street Global Advisors SPDR. "[SPDR® S\&P 500® ETF Trust](https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-sp-500-etf-trust-spy)." 2. U.S. Securities and Exchange Commission. "[Mutual Funds and ETFs: A Guide for Investors](https://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf)." Page 4. 3. U.S. Securities and Exchange Commission. "[Mutual Funds and ETFs: A Guide for Investors](https://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf)." Page 5. 4. Goldman Sachs Asset Management. "[ETF Tax Efficiency 101](https://www.gsam.com/content/dam/gsam/pdfs/us/en/tax-information/ETF_Tax_Efficiency_101.pdf?sa=n&rd=n#:~:text=capital%20gains.1-,In-Kind%20Redemptions,than%20selling%20securities%20for%20cash.)." Page 1. 5. U.S. Securities and Exchange Commission. "[Investor Bulletin: Exchange-Traded Funds (ETFs)](https://www.sec.gov/investor/alerts/etfs.pdf)." Page 1. 6. U.S. Securities and Exchange Commission. "[SEC Staff Report to Congress Regarding the Study on Threshold Limits Applicable to Diversified Companies](https://www.sec.gov/files/staff-report-threshold-limits-diversified-funds.pdf)." Page 4. 7. Office of the Law Revision Council United States Code. "[Part I-Regulated Investment Companies](https://uscode.house.gov/view.xhtml?path=/prelim@title26/subtitleA/chapter1/subchapterM/part1&edition=prelim)." 8. U.S Securities and Exchange Commission. "[Investment Company Registration and Regulation Package](https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504htm.html)." 9. U.S Securities and Exchange Commission. "[SPDR Exchange Traded Funds - Basics of Product Structure](https://www.sec.gov/Archives/edgar/data/1222333/000119312514287007/d766507dfwp.htm)." 10. U.S. Securities and Exchange Commission. "[SPDR Exchange Traded Funds](https://www.sec.gov/Archives/edgar/data/1222333/000095012310084263/y03927fwp.htm)." 11. Fidelity. "[ETF vs. mutual funds: Cost comparison](https://www.fidelity.com/learning-center/investment-products/etf/etfs-cost-comparison)." 12. Vanguard. "[VFIAX 500 Index Fund Admiral Shares](https://advisors.vanguard.com/investments/products/vfiax/vanguard-500-index-fund-admiral-shares)." 13. Vanguard. "[VOO S\&P 500 ETF](https://advisors.vanguard.com/investments/products/voo/vanguard-sp-500-etf#overview)." Part of the Series Exchange-Traded Fund Guide for Beginners [Exchange-Traded Fund (ETF): What It Is and How to Invest](https://www.investopedia.com/terms/e/etf.asp) ETF Basics 1. [7 Best ETF Trading Strategies for Beginners](https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp) 2. [Introduction to Exchange-Traded Funds (ETFs)](https://www.investopedia.com/articles/01/082901.asp) 3. [7 Easy-to-Understand ETFs to Replace A Savings Account](https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx) 4. [Brief History of ETFs](https://www.investopedia.com/articles/exchangetradedfunds/12/brief-history-exchange-traded-funds.asp) 5. [ETFs Open Secret as a Tax Loophole](https://www.investopedia.com/news/etf-open-secret-theyre-tax-loophole/) 6. [ETF Market Price vs. ETF Net Asset Value: What's the Difference?](https://www.investopedia.com/ask/answers/052815/what-difference-between-etfs-net-asset-value-nav-and-its-market-price.asp) 7. [Going Green With Exchange-Traded Funds (ETFs)](https://www.investopedia.com/articles/exchangetradedfunds/11/going-green-with-etfs.asp) 8. [How Are ETF Fees Deducted?](https://www.investopedia.com/ask/answers/071816/how-are-etf-fees-deducted.asp) 9. [How are ETFs Taxed?](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp) Pros and Cons 1. [ETFs Can Be Safe Investments If Used Correctly](https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp) 2. [Advantages and Disadvantages of ETFs](https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp) 3. [Advantages of Exchange-Traded Funds (ETFs)](https://www.investopedia.com/ask/answers/09/etfs-vs-mutual-funds.asp) 4. [Why ETF Investing Is Ideal for Young Investors](https://www.investopedia.com/articles/younginvestors/09/etfs-ideal.asp) 5. [What Are the Biggest Risks When Investing in ETFs?](https://www.investopedia.com/articles/etfs-mutual-funds/061416/biggest-etf-risks.asp) Investing in ETFs 1. [How To Pick the Best ETF](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-choose-best.asp) 2. [New Ways to Buy ETFs Online](https://www.investopedia.com/articles/etfs/071716/buying-etfs-online-easy-heres-how.asp) 3. [Dollar-Cost Averaging With ETFs](https://www.investopedia.com/articles/mutualfund/05/etfdollarcost.asp) 4. [Are ETFs a Good Fit for 401(k) Plans?](https://www.investopedia.com/articles/financial-advisors/101315/are-etfs-good-fit-401k-plans.asp) 5. [Exchange Traded Notes: An Alternative to ETFs](https://www.investopedia.com/investing/etfs-vs-etns/) 6. [Exchange Traded Product (ETP): Definition, Types, and Example](https://www.investopedia.com/terms/e/exchange-traded-products-etp.asp) 7. [Index Fund vs. ETF: What's the Difference?](https://www.investopedia.com/ask/answers/033015/whats-difference-between-index-fund-and-etf.asp) ETFs and Mutual Funds 1. [Mutual Fund vs. ETF: What's the Difference?](https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp) CURRENT ARTICLE 2. [ETFs vs. Mutual Funds: Which Is Better for Young Investors?](https://www.investopedia.com/articles/investing/021916/etfs-vs-mutual-funds-which-better-young-investors.asp) 3. 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Readable Markdown	## Mutual Fund vs. ETF: An Overview Mutual funds and ETFs are popular investment options designed for diversification. While mutual funds are often actively managed with purchases limited to end-of-day [net asset value](https://www.investopedia.com/ask/answers/04/032604.asp) pricing, ETFs offer intra-day trading flexibility and are typically passively managed. Understanding these and other differences is crucial for selecting the right investment strategy. Mutual funds have been around for a century. The first mutual fund was [launched](https://www.investopedia.com/articles/mutualfund/05/mfhistory.asp) in 1924. ETFs are relatively new entrants in the investment arena. The first ETF debuted in January 1993: the SPDR S\&P 500 ETF Trust (SPY). Fund managers make decisions about how to allocate assets in a mutual fund so most funds are actively managed. ETFs are usually passively managed. They track market indexes or specific sector indexes. A growing range of actively managed ETFs is available to investors. Index funds are passively managed and usually come with lower fees. They make up a significant proportion of mutual funds' assets under management. ### Key Takeaways - Mutual funds are usually actively managed. Index funds are passively managed and have become more popular. - ETFs are usually passively managed and track a market index or sector sub-index. - ETFs can be bought and sold just like stocks but mutual funds can only be purchased at the end of each trading day. - Actively managed funds tend to have higher fees and higher expense ratios due to their higher operations and trading costs. - An open-ended mutual fund has no limit to the number of shares but a closed-ended fund has a fixed number of shares regardless of investor demand. Get personalized, AI-powered answers built on 27+ years of trusted expertise. ## Understanding Mutual Funds Mutual funds typically have a higher minimum investment requirement than ETFs. Funds with no minimum investment are available but a typical retail fund requires a [minimum investment](https://www.investopedia.com/ask/answers/111714/what-minimum-amount-money-i-can-invest-mutual-fund.asp#:~:text=Although%20there%20are%20mutual%20funds,least%20%241%20million%20or%20more.) of between \$500 and \$5,000. Minimums can vary depending on the type of fund and company. Many mutual funds are [actively managed](https://www.investopedia.com/articles/investing/111115/5-reasons-choose-mutual-funds-over-etfs.asp) by a fund manager or team who makes decisions to buy and sell stocks or other securities within that fund to beat the market and help their investors profit. These funds usually come at a higher cost because they require substantially more time, effort, and manpower for securities research and analysis. Mutual fund purchases and sales occur directly between investors and the fund. The fund's price isn't determined until the end of the [business day](https://www.investopedia.com/terms/b/business-day.asp) when [net asset value](https://www.investopedia.com/terms/n/nav.asp) (NAV) is determined. ## Exploring Types of Mutual Funds Mutual funds have [two legal classifications](https://www.investopedia.com/financial-edge/0712/closed-end-vs.-open-end-funds.aspx): open-ended and closed-end. The distinctions between them lie in the fund shares. ### What Are Open-Ended Mutual Funds? These funds dominate the mutual fund marketplace in volume and assets under management. The purchase and sale of fund shares take place directly between investors and the fund company. There's no limit to the number of shares the fund can issue. More shares are issued as more investors buy into the fund. Federal regulations require a daily valuation process referred to as marking to market. This subsequently adjusts the fund's per-share price to reflect changes in portfolio value. The value of an individual's shares isn't affected by the number of shares outstanding. ### What Are Closed-End Mutual Funds? Closed-end funds issue only a specific number of shares. They don't issue new shares as investor demand grows. Prices aren't determined by the net asset value (NAV) of the fund. They're driven by investor demand. Purchases of shares are often made [at a premium](https://www.investopedia.com/terms/a/at-a-premium.asp) or discount to NAV. ### Important It's important to factor in the fee structures and tax implications of these investment choices before deciding if and how they fit into your portfolio. ## Delving into Exchange-Traded Funds (ETFs) ETFs can cost far less for an entry position, as little as the cost of one share [plus fees or commissions](https://www.investopedia.com/articles/investing/091515/comparing-etf-gross-vs-net-expense-ratios.asp). An ETF is created or redeemed in large lots by [institutional investors](https://www.investopedia.com/terms/i/institutionalinvestor.asp) and the shares trade between investors throughout the day like a stock. ETFs can be sold short. These provisions are important to traders and speculators but of little interest to long-term investors. ETFs are priced continuously by the market, however, so there's the potential for trading to take place at a price other than the true NAV. This may introduce an opportunity for [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp). ETFs offer tax advantages to investors. As [passively managed](https://www.investopedia.com/terms/p/passivemanagement.asp) portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds. ### Fast Fact The United States is a significant player in the global market for mutual funds and ETFs, contributing notably to the total worldwide assets in regulated open-end funds. ### How ETF Creation and Redemption Work The [creation/redemption process](https://www.investopedia.com/articles/mutualfund/05/062705.asp) of ETFs distinguishes them from other investment vehicles and provides several benefits. Creation involves buying all the underlying securities that constitute the ETF and bundling them into the ETF structure. Redemption involves unbundling the ETF back into its individual securities. The ETF creation and redemption process occurs in the [primary market](https://www.investopedia.com/terms/p/primarymarket.asp) between the [ETF sponsor](https://www.investopedia.com/terms/e/etf-sponsor.asp) and authorized participants (APs). The APs assemble the securities included in the ETF in their correct weights and deliver those securities to the ETF sponsor. ### Fast Fact The sponsor is the ETF issuer and fund manager that administers and markets the ETF. Authorized participants include U.S.-registered broker-dealers who have the right to create and redeem shares of an ETF. An S\&P 500 ETF would require that the APs create ETF shares by assembling all the S\&P 500 constituent stocks based on their weights in the S\&P 500 index and delivering them to the ETF sponsor. The ETF sponsor then bundles these securities into the ETF wrapper and delivers the ETF shares to the APs. ETF share creation is generally done in large increments such as 50,000 shares. The new ETF shares are then listed on the secondary market and traded on an exchange. The ETF redemption process is the opposite of ETF creation. APs aggregate ETF shares known as redemption units in the secondary market and deliver them to the ETF sponsor in exchange for the underlying securities of the ETF. ### Advantages of Investing in ETFs The unique ETF creation/redemption process results in ETF prices tracking their net asset value closely because the APs monitor demand for an ETF closely. They act promptly to reduce significant premiums or discounts to the ETF's NAV. The creation/redemption process also relieves the ETF's fund manager of the responsibility of buying or selling the ETF's underlying securities except when the ETF portfolio has to be rebalanced. An ETF redemption is an "in kind" transaction because it involves ETF shares being exchanged for the underlying securities. It's typically tax-exempt and this makes ETFs more tax efficient. The process of creating and redeeming shares of a mutual fund can trigger capital gains tax liabilities for all shareholders of the mutual fund but this is less likely to occur for ETF shareholders who aren't trading shares. The ETF shareholder is still on the hook for capital gains tax when the ETF shares are sold but the investor can choose the timing of such a sale. ### Fast Fact ETFs may be more tax-efficient than mutual funds because of the way they're created and redeemed. ## Different Structures of ETFs ETFs have three structures. ### Exchange-Traded Open-End Fund The majority of ETFs are registered under the SEC's [Investment Company Act of 1940](https://www.investopedia.com/terms/i/investmentcompanyact.asp) as open-end management companies. This ETF structure has specific diversification requirements. No more than 5% of the portfolio can be invested in securities of a single stock. This structure offers greater portfolio management flexibility compared to the Unit Investment Trust structure because it's not required to fully replicate an index. Several open-end ETFs use optimization or sampling strategies to replicate an index and match its characteristics rather than owning every single constituent security in the index. Open-end funds are also permitted to reinvest dividends in additional securities until distributions are made to shareholders. Securities lending is allowed and derivatives can be used in the fund. ### Exchange-Traded Unit Investment Trust (UIT) Exchange-traded UITs also are governed by the Investment Company Act of 1940 but these must attempt to fully replicate their specific indexes to limit tracking error. They must limit investments in a single issue to 25% or less and set additional weighting limits for diversified and non-diversified funds. The first ETFs such as the SPDR S\&P 500 ETF were structured as UITs. They don't automatically reinvest dividends but pay cash dividends quarterly. They're not permitted to engage in securities lending or hold derivatives. Some examples of this structure include the QQQQ and Dow DIAMONDS (DIA). ### Exchange-Traded Grantor Trust This is the preferred structure for ETFs that invest in commodities. They're structured as [grantor trusts](https://www.investopedia.com/terms/g/grantortrustrules.asp) which are registered under the Securities Act of 1933 but not registered under the Investment Company Act of 1940. This type of ETF bears a strong resemblance to a closed-ended fund but an investor owns the underlying shares in the companies in which the ETF is invested. This includes holding the voting rights associated with being a shareholder. The composition of the fund doesn't change, however. Dividends aren't reinvested but are paid directly to [shareholders](https://www.investopedia.com/terms/s/shareholder.asp). Investors must trade in 100-share lots. Holding company depository receipts (HOLDRs) is one example of this type of ETF. ### Mutual Funds vs. ETFs Mutual Funds - Can own a variety of securities. - Shares are purchased and sold only with the fund provider. - Orders only settle after the market closes. - Minimum investment is usually a flat dollar amount. - May be active or passively managed. - May be less tax efficient because sales of securities within the fund can generate capital gains. ETFs - Can own a variety of securities. - Shares can be traded between investors. - Orders settle during market hours. - Minimum investment is typically equal to the price of one share. - Are usually passively managed. - May be more tax-efficient. ## A Detailed Comparison: Mutual Funds vs. ETFs Mutual funds and ETFs both offer the opportunity to more easily gain exposure to a large number of securities. Both are managed by a fund manager who tries to achieve the stated investment goals of the fund. An S\&P 500 mutual fund or ETF typically tries to match the makeup and returns of the S\&P 500 index. Investors can buy shares in the fund to get exposure to all the securities that it holds. Fund managers charge a fee called an expense ratio in exchange for managing the fund. One of the key differences between ETFs and mutual funds is in how they're traded. You buy and sell shares directly with the fund provider with mutual funds. Transactions also only occur after trading ends for the day and the fund's manager can calculate the value of a share in the fund. ETFs trade more like stocks. You can buy and sell shares in an ETF on the open market with other investors. It's also possible to buy or redeem shares with the fund provider but this is less common. Shares trade throughout the day rather than after the market closes so ETFs are a better choice for active traders. ETFs are often cheaper to invest in as well. Mutual funds typically have minimum investment requirements of hundreds or thousands of dollars. You can invest in an ETF if you have enough money to buy a single share. ETFs are usually passively managed. Some mutual funds have more active management so ETF expense ratios are usually lower. ## Mutual Fund vs. ETF Redemption Example Suppose an investor redeems \$50,000 from a traditional Standard & Poor's 500 Index (S\&P 500) fund. The fund must sell \$50,000 in stock to pay the investor. The fund captures the capital gain if appreciated stocks are sold to free up the cash for the investor. This is distributed to shareholders before the year's end. Shareholders pay the taxes for the turnover within the fund as a result. The ETF doesn't sell any stock in the portfolio if an ETF shareholder wants to redeem \$50,000. It instead offers shareholders "in-kind redemptions" that limit the possibility of paying capital gains tax. ## Is It Better to Invest in the Market Through a Mutual Fund or ETF? The main difference between a mutual fund and an ETF is that an ETF has intra-day liquidity. The ETF might therefore be the better choice if the ability to trade like a stock is an important consideration for you. ## Are ETFs Riskier Than Mutual Funds? ETFs and mutual funds that otherwise follow the same strategy or track the same index are constructed somewhat differently so there's no reason to believe that one is inherently riskier than the other. The risk of a fund depends largely on its underlying holdings, not the structure of the investment. ## Do Index ETF vs. Mutual Fund Fees Differ Given the Same Passive Strategy? The difference in fees is marginal in many cases. Some of the biggest and most popular S\&P 500 ETFs have an [expense ratio](https://www.investopedia.com/terms/e/expenseratio.asp) of 0.03%. Vanguard's S\&P 500 ETF (VOO) has an expense ratio of 0.03%. The Vanguard 500 Index Fund Admiral Shares (VFIAX) has an expense ratio of 0.04%. ## Do ETFs Pay Dividends? Yes, many ETFs will pay dividend distributions based on the dividend payments of the stocks that the fund holds. ## Have Index Funds Become More Popular? Index funds track the performance of a market index. They can be formed as either mutual funds or ETFs. These funds have become more popular because they're passively managed and usually come with lower fees. They have lower research and management costs, and this can be passed on to the investor in the form of lower expense ratios. ## The Bottom Line Mutual funds and ETFs offer investors diversified exposure to numerous securities, allowing them to spread risk instead of relying on individual company performance. ETFs are typically passively managed, more tax-efficient, and can be traded like stocks throughout the trading day, making them appealing for active traders. Conversely, mutual funds, often actively managed with higher expense ratios, are transacted at a single price after market close. Understanding these key differences and their potential tax implications can help investors choose the right fund type to align with their trading strategies and financial goals. Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.
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