Should I invest in ETFs or mutual funds? Here's how to choose.
Investors and retirement savers who want to own broad swaths of the stock and bond markets often face a choice: Do they want to buy time-honored mutual funds, or upstart exchange-traded funds?
If you’re wondering which is the better option, investors have more or less answered that question, voting with their feet. New investment dollars are now more likely to flow into exchange-traded funds, or ETFs, than mutual funds, said Kathy Kellert, head of index equity product at Vanguard. But each investment vehicle has its pros and cons.
Here’s a short primer.
Mutual funds date to the 1920s, but they didn’t really catch on with the general public until the 1980s, Investopedia reports.
Simply put, a mutual fund pools money from multiple investors to purchase a collection of stocks, bonds or other assets.
Exchange-traded funds debuted in 1993 but didn’t take off until the new millennium. They resemble mutual funds but trade like stocks. Some financial experts think of ETFs as a new-and-improved version of the mutual fund.
ETFs aren’t necessarily better than mutual funds, but they are certainly hotter. Total ETF assets have risen from about $2 trillion in early 2015 to more than $10 trillion in early 2025, according to federal data. In the same period, mutual fund assets have risen from $13.5 trillion to about $21 trillion.
“ETFs are definitely the golden child of the investment world right now,” said Jonathan Swanburg, a certified financial planner in Houston.
Swanburg is more likely to recommend ETFs to his clients. He is not alone.
“ETFs are better in a lot of ways,” said Stephen Kates, a financial analyst at Bankrate.
Pros and cons of ETFs and mutual funds
Here are a few ways ETFs might be considered superior to mutual funds:
ETFs trade throughout the day, like stocks. You can buy or sell shares in real time. Mutual funds, by contrast, are priced only once a day, at the end of trading. That makes it harder to react to market fluctuations when you buy or sell.
It is generally cheaper to invest in an ETF. With many mutual funds, a first-time investor has to “put in a minimum amount: $1,000, $3,000,” said Robert Brokamp, a senior advisor at The Motley Fool.
ETFs are mostly bought and sold by the share, and you can start with one share.
ETFs are also considered more “tax-efficient” than mutual funds. It’s complicated: Suffice to say that mutual fund investors “may see a slightly higher tax bill” because of the way the funds are managed, which can generate capital gains, according to Investopedia.
The tax efficiency of ETFs matters less, though, if the shares sit in a tax-advantaged retirement account.
And here are some potential advantages to mutual funds:
A mutual fund is optimally designed for a retirement saver who wants to invest a set dollar amount every month, or every paycheck, as with a 401(k) workplace retirement plan.
If you are splitting a $500 contribution across five mutual funds, “100% of that money goes where you want it,” Swanburg said.
It’s harder to do that with an ETF, just as it’s harder to buy exactly $100 worth of stock shares.
“ETFs trade like stock, on an exchange,” Kellert said. “Generally, you’re buying whole shares.”
Mutual funds rule workplace retirement plans
Mutual funds remain dominant in employer retirement plans, Kellert said, although 401(k) plans increasingly offer ETF options. The ETF is designed for real-time trading, while workplace retirement plans are tailored for relatively hands-off, long-term investing.
Mutual funds have a much longer track record than ETFs. An investor who owns shares of the Fidelity Contrafund or the Vanguard Wellington Fund owns a piece of mutual-fund history: Both are actively managed funds with decades of proven performance.
“There are some mutual funds out there that I have so much respect for that are actively managed,” said Monica Dwyer, a certified financial planner in West Chester, Ohio.
An investor who’s looking for “a fund with an experienced manager who actively selects investments based on market conditions” will generally find “more mutual fund choices than ETF choices,” said Sam Taube, lead investing writer at NerdWallet.
Many of the most popular ETFs and mutual funds are index funds: They mirror the performance of the S&P 500 or some other group of stocks or bonds.
But the ETF world has a reputation for risk. Many ETFs are “leveraged,” aiming to magnify the returns on an index or individual stock. Leveraged ETFs can yield big rewards, and big losses.
“For people who do want to actively trade, there are so many interesting or unique ETFs out there that didn’t exist a few years ago,” said Kates of Bankrate. “Some of them are very aggressive in their strategy, some are extremely volatile, and some are downright dangerous.”
Many mutual funds offer high risks and high rewards. Yet, comparatively speaking, the ETF landscape is the Wild West of pooled investment funds.
“Just because it’s an ETF doesn’t in any way mean it’s safe,” Swanburg said.
Mutual fund or ETF: Which is the right choice?
Here, to summarize, are some reasons to choose an ETF over a mutual fund, or vice-versa.
Reasons to consider an ETF:
- You buy and sell a lot. Real-time trading is possible with ETFs, but not with mutual funds.
- You’re worried about capital gains tax. ETFs are considered more tax-efficient than mutual funds.
- You don’t want to make a large initial investment. Mutual funds often require four-figure buy-ins.
Reasons to consider a mutual fund:
- You make regular contributions. It’s generally easier to invest set dollar amounts in a mutual fund account.
- You want to invest in a well-known, actively managed fund. Many managed mutual funds have long track records.
- You’re a 401(k) retirement saver. It’s generally harder to incorporate ETFs into a 401(k).