ETF vs Mutual Fund. What's the Difference?

ETFs and mutual funds are more similar than they are different. Both pool your money with other investors. Both give you exposure to a diversified collection of assets. Both come in passive and active varieties. The differences come down to how they are traded, what they cost, and how they are structured.

How they are traded

An ETF trades on a stock exchange throughout the day, just like a share. You can buy or sell it at any moment while the market is open, and the price fluctuates in real time. A mutual fund is priced once per day, after the market closes. You buy or sell at that end-of-day price regardless of when you place your order.

How they differ on cost

ETFs, particularly passive ones that track an index, tend to have lower ongoing fees than actively managed mutual funds. This difference compounds significantly over decades. A fund charging 1% per year will cost you far more over 30 years than one charging 0.10%, even if both deliver identical returns before fees.

Minimum investment

Many mutual funds require a minimum investment, sometimes several hundred or thousands of dollars. ETFs can be bought one share at a time, and some brokers allow fractional shares, making them more accessible for investors starting with smaller amounts.

Which is better for most beginners?

For most people starting out, a low cost passive ETF tracking a broad index is a strong choice. It is simple, cheap, liquid, and requires no faith in a fund manager's ability to beat the market.