Introduction When it comes to investing in the stock market, mutual funds and exchange-traded funds (ETFs) are two popular options. Both offer investors the opportunity to diversify their portfolio and gain exposure to a wide range of assets. However, there are significant differences between the two investment vehicles that investors should consider before making a decision.
Fees and Costs One crucial factor to consider is the fees, commissions, and other costs associated with your choice. ETFs are often touted as being cheaper than mutual funds since most of them are index funds with no active manager. According to data from the Investment Company Institute, the average expense ratio for ETFs in 2020 was 0.48%, compared to 0.81% for mutual funds.
Tax Efficiency Another important consideration is tax efficiency. ETFs are usually more tax-efficient than mutual funds because ETF shares are traded on an exchange like a stock. This allows investors to buy and sell ETF shares without triggering capital gains taxes for other shareholders. On the other hand, when mutual fund shareholders redeem their shares, the fund manager may need to sell securities, which can result in taxable capital gains for all shareholders.