|How are they managed?||While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index.||Mutual funds come in both active and indexed varieties, but most are actively managed. Active mutual funds are managed by fund managers.|
|What about tax efficiency?||ETFs often generate fewer capital gains for investors since they may have lower turnover and can use the in-kind creation/redemption process to manage the cost basis of their holdings.||A sale of securities within a mutual fund may trigger capital gains for shareholders—even for those who may have an unrealized loss on the overall mutual fund investment.|
|What are the costs?||ETFs have implicit and explicit costs. While your broker will disclose the cost of trading commissions and the ETF provider will disclose the operating expense ratio, don’t overlook the bid/ask spread and premium/discount to NAV. These costs are implicit and result from buying or selling an ETF in the market at a price which may differ from the value of the ETF’s underlying holding.||Mutual funds can be purchased without trading commissions, but in addition to operating expenses they may carry other fees (for example, sales loads or early redemption fees.|
|What’s the minimum investment?||Because they trade like stocks, ETFs do not require a minimum initial investment and are purchased as whole shares. You can buy an ETF for the price of just one share, usually referred to as the ETF’s “market price.”||Minimum initial investments for mutual funds are normally a flat dollar amount and aren’t based on the fund’s share price.|
Unlike ETFs, mutual funds can be purchased in fractional shares or fixed dollar amounts.
|How are they traded?||ETFs trade like stocks and are bought and sold on a stock exchange, experiencing price changes throughout the day. This means that the price at which you buy an ETF will likely differ from the prices paid by other investors.||Mutual fund orders are executed once per day, with all investors on the same day receiving the same price.|