Both Exchange-Traded Funds (ETFs) and Mutual Funds allow you to buy a basket of stocks or bonds in a single purchase. However, they trade differently.
Key Differences
- Trading: ETFs trade like stocks throughout the day. Mutual funds trade only once a day at the closing price.
- Fees: ETFs generally have lower expense ratios than actively managed mutual funds.
- Minimums: Mutual funds often have minimum investment requirements (e.g., $3,000), while you can buy 1 share of an ETF.
Tax Efficiency
ETFs are generally more tax-efficient than mutual funds. Due to their unique structure, ETFs rarely distribute capital gains to shareholders, whereas mutual funds must pass on capital gains taxes to you even if you didn't sell any shares.
Active vs. Passive Management
Most ETFs are "passive," meaning they track an index like the S&P 500. Mutual funds are often "active," meaning a manager tries to beat the market. Statistics show that over the long term, passive funds (ETFs) tend to outperform active funds due to lower fees.