Mutual funds vs. ETFs: Investing made simple

When comparing ETFs vs. mutual fund investment options, it’s important to understand the unique features of each, especially if you’re preparing for a financial licensing exam or deciding which instrument to invest in. Both ETFs (exchange-traded funds) and mutual funds are popular vehicles for building a diversified portfolio, but differences in cost, flexibility, and tax efficiency can impact your financial strategy. Understanding how these investment products work can help you make informed decisions and gain the insights necessary to pass the Series 6, Series 7, or other related certification tests.

What’s in our guide

This article provides a comprehensive breakdown of how ETFs and mutual funds function, tailored for investors and those studying for Financial Industry Regulatory Authority (FINRA) licensing exams. You’ll learn how each fund structure operates, key distinctions, and which investment aligns better with your goals, enhancing your regulatory knowledge along the way. We'll be covering:

• How ETFs and mutual funds are bought and sold: See how intraday trading with ETFs compares to end-of-day mutual fund transactions.
• Costs and expense ratios: Compare management fees, sales charges, and commissions to understand why ETFs often feature lower costs than mutual funds.
• Management styles: Explore passive and active management approaches, and how each strategy is implemented by ETFs and mutual funds.
• Tax efficiency: Discover how the unique “in-kind” redemption process of ETFs typically reduces capital gains, giving ETFs a tax advantage over mutual funds.
• Minimum investment requirements: Learn why ETFs can be purchased with smaller amounts compared to typical mutual fund minimums.
• Automatic investing options: Find out which structure supports easier recurring investments and facilitates long-term dollar-cost averaging.
• Transparency of holdings: Understand how often ETFs and mutual funds disclose their portfolio holdings and why this matters for investor confidence and regulatory compliance.
• Performance expectations: See how factors such as cost structure, investment strategy, and product design influence long-term returns beyond simply choosing an ETF or mutual fund.

Whether you’re an investor evaluating ETFs or mutual fund choices or studying for your Series 6 license or similar, this guide delivers practical insights to help you navigate these core investment products. By understanding the nuances between these two related but distinct vehicles, you’ll be equipped to decide which option is right for you and/or make suitable recommendations to your clients.

How they are bought and sold

One of the primary differences between mutual funds and ETFs is the manner in which they are bought, sold, and traded in financial markets. Mutual funds trade only once per day, after the market closes. Regardless of when you buy or sell, your order is filled at the fund’s net asset value (NAV), which is calculated at the end of the trading session. Investors purchase shares directly from the fund company or through an investment platform.

ETFs, on the other hand, trade on stock exchanges throughout the day, just like individual stocks. Their price fluctuates based on supply and demand, which means you can buy, sell, and set limit orders in real time. Trades occur instantly at market price, not at a once-a-day NAV.

Key takeaway: If you want hourly flexibility, ETFs are the way to go. If you prefer the simplicity of end-of-day pricing, mutual funds are a straightforward option.

Costs and expense ratios

Both ETFs and mutual funds charge annual management fees; however, ETFs tend to have lower expense ratios, particularly for index-based products. Expense ratios refer to the yearly cost of owning a fund, measured as a percentage of investments within the fund itself. Many broad-market ETFs have extremely low fees due to efficient structures and passive management styles.

Additional costs:

• Mutual funds may include sales loads (either upfront or upon withdrawal), although no-load funds are more common today.
• ETFs have no sales loads; however, investors may still incur brokerage commissions, depending on the platform, and may face spreads between the buy and sell prices.

Key insight: ETFs are generally more cost-effective, especially for long-term, passive investing.

Management styles: Passive vs. active

Another key difference between ETFs and mutual funds is management strategy and whether investors are more likely to actively control investments or track established indices. Mutual funds, in particular, are widely available in both actively managed and passive formats. Professional portfolio managers who strive to outperform market benchmarks take an active role in fund management. Passive mutual funds, on the other hand, simply track a market index, offering a more hands-off approach that is popular with casual investors.

Many ETFs are mainly designed to be passive, tracking indexes and offering low expense ratios. However, actively managed ETFs have seen rapid growth and now represent a significant segment of the ETF market, making knowledge of their structure and strategy valuable.

In summary: If you’re studying for the Series 6 exam or working toward your Series 6 license, remember that mutual funds have the longest history with actively managed strategies, but active ETFs are now strong competitors in the marketplace.

Tax efficiency

One of the most significant differences between ETFs and mutual funds is how they manage taxes.

• Mutual Funds: When other investors redeem their shares, mutual fund managers may need to sell securities, resulting in capital gains. Those gains are passed on to all shareholders, even if you personally did nothing.
• ETFs: ETF shares are created and redeemed through an “in-kind” process that allows funds to offload appreciated securities without triggering as many taxable events. This structure often makes ETFs more tax-efficient.

Main point: In taxable investment accounts, ETFs typically lead to fewer unexpected capital gains distributions.

Minimum investments

In terms of upfront costs, mutual funds typically require a minimum initial investment, which often ranges from a few hundred to several thousand dollars. This investment threshold is particularly important for those working with a Series 6 or 7 license, as mutual funds are among the primary products representatives are qualified to offer. Clients must be prepared to make an initial investment to participate in the fund.

ETFs, though, offer a more approachable path, especially for those new to investing. Since ETFs trade on an exchange like stocks, investors can typically buy into an ETF with the cost of a single share, or even less if their brokerage offers fractional shares. This lower entry point enables more individuals to participate in ETF investing, including those new to trading.

Key takeaway here: ETFs are often more accessible, as they enable individuals to start investing with smaller amounts of capital.

Automatic investing and withdrawals

Mutual funds are ideal for automatic investing. You can set up recurring monthly contributions directly through the fund company, making dollar-cost averaging extremely simple. Most brokerages do not allow automatic purchases of ETFs in the same way, although some platforms allow recurring fractional-share buys.

Main insight: Mutual funds offer more robust automation for hands-off investors.

Transparency and holdings

Most ETFs publish their full holdings on a daily basis, providing high transparency. Mutual funds, however, usually report holdings quarterly, sometimes with a delay. This makes ETFs easier to track on a regular basis.

In summary: If transparency is important, ETFs offer more frequent updates.

Performance expectations

When evaluating performance between ETFs and mutual funds, the primary factor is what the fund invests in, not simply whether it’s structured as an ETF or a mutual fund. If an ETF and a mutual fund both track the same index (for example, the S&P), their performance will be nearly identical, with slight variations mainly caused by differing expense ratios.

The significant performance differences between ETF vs. mutual fund options typically appear when comparing:

• Passive index ETFs vs active mutual funds, or
• Low-cost ETFs vs higher-fee mutual funds

Extensive academic research on ETFs and mutual funds indicates that lower fees consistently lead to superior long-term results. This is a key reason why many investors prefer ETFs over traditional mutual funds.

Which should you choose?

Choose ETFs if you want:

• Lower expense ratios and cost efficiency
• Real-time trading and intraday pricing flexibility
• Greater tax efficiency for taxable accounts
• Lower minimum investment requirements
• Daily portfolio transparency

Choose mutual funds if you want:

• Automated contributions and systematic withdrawals
• Access to actively managed strategies and experienced fund managers
• Simple end-of-day pricing and straightforward transactions
• Retirement accounts with integrated mutual fund options

While ETFs offer an easier path into investing, mutual funds benefit seasoned investors who are better positioned to make strategic management decisions. Many investors use a combination: ETFs for taxable brokerage accounts due to their tax efficiency, and mutual funds in retirement plans where automated contributions are available. Overall, however, potential returns depend more on the positions within the fund than on whether it's structured as an ETF or a mutual fund.

Final thoughts

When comparing mutual fund vs. ETF options, both can be powerful investment vehicles for building long-term wealth. The right choice depends on your or your clients’ investing style, tax considerations, and whether intraday trading or automated, hands-off investing is preferred. Regardless of which option you select, focusing on diversification, consistent investing, and minimizing costs will be the most important elements for achieving long-term investment success.