ETFs vs. mutual funds: Key differences for investors

Core Insights - Mutual funds and exchange-traded funds (ETFs) serve similar purposes for investors but have key differences that may influence financial choices [1] Trading Mechanism - ETFs trade on stock exchanges like stocks, allowing investors to know their exact purchase price at the time of transaction, while mutual fund transactions occur directly with the fund and prices are only known at the end of the trading day [2][3] Tax Efficiency - ETFs are generally more tax-efficient than mutual funds, with only 6.5% of U.S. stock ETFs distributing capital gains in 2024 compared to 78% of U.S. stock mutual funds [6] - For international stock funds, about 6% of ETFs distributed capital gains versus 42% for mutual funds [7] - The "in-kind" transaction mechanism used by ETF managers helps avoid triggering capital gains taxes, a significant advantage for long-term investors [8] Cost Structure - The average asset-weighted investment fee for ETFs was 0.42% in 2024, compared to 0.57% for mutual funds, indicating that ETFs are generally cheaper to own [10] - Many ETFs are index funds, which tend to have lower fees than actively managed mutual funds, contributing to the cost differential [11] Availability and Accessibility - The universe of mutual funds is larger, which may limit access to certain funds for investors who prefer ETFs [13] - ETFs may not be available in 401(k) plans, restricting options for some investors [13][14]