ETFs vs Mutual Funds: Key Differences Explained

One of the most visible differences between ETFs and mutual funds is how investors buy and sell them.

Mutual funds are bought and sold directly from the mutual fund company at the current day’s closing price. As a result, everyone who places a “buy” or “sell” order for a mutual fund on a given day will get filled at the same price, regardless of what time of day their order is placed.

ETFs trade throughout the trading day, just like stocks. That means when you place an order to buy or sell an ETF, you can see the current market price at which it’s trading.

Investors can place market orders, limit orders, and stop-loss orders while markets are open. 

Limit orders can be particularly helpful to investors during periods of heightened volatility or less-than-normal liquidity. As the name implies, “limit” orders can be a useful tool for investors who want to have more control over the price they pay or receive for an ETF.

Similarly, you can place a stop-loss order on an ETF you already own. Stop-loss orders — which trigger the sale of an asset if it reaches a certain price — can help prevent you from losing paper profits or suffer major losses during periods of acute market stress. 

A stop-loss order can be set as a fixed price or as a percentage of the current market price. For example, you can place a stop-loss order at $10 per share or at 10% below the current market price. The drawback of a stop-loss order is the risk of a sale being triggered by a temporary price fluctuation which could cause you to lose out on any potential rebound in the share price.

Taxes are often one of the most important differences between ETFs and mutual funds, particularly in taxable brokerage accounts.

ETFs are designed to be tax-efficient and accounted for just 1% of the fund industry’s capital gains distributions in 2025, despite holding 30% of U.S. managed fund assets.¹

A key feature explaining why ETFs can be so tax efficient is ETFs typically use an in-kind creation and redemption process. This mechanism may help reduce the need for ETF managers to sell underlying securities when investors buy or sell shares.

In addition, because investors buy and sell ETF shares with other investors on an exchange, ETF managers don't have to sell holdings to meet all investor redemptions — potentially creating realized capital gains in the process. If you're invested in an ETF, you control when to buy or sell the ETF, making it easier to avoid those higher short-term capital gains tax rates.

Certain traditional mutual funds can be tax efficient and, of course, ETF shareholders can incur tax consequences when they sell, but that tax consequence is not passed on to other ETF shareholders. Mutual funds can make distributions while you’re still invested — and you pay capital gains taxes on those even if you don’t sell. Notably, 80% of active mutual funds paid capital gains in the last five years, but only 18% of active ETFs did.²

For investments in so-called qualified accounts like a 401(k) or IRA, you’re generally insulated from the impact of taxation. That is one reason mutual funds have historically been featured in retirement accounts. Also, the fact mutual funds don’t trade on an intraday basis like ETFs may make it easier for 401(k) administrators to manage their record keeping.

But for investors with taxable (non-qualified) accounts, owning low cost and tax-efficient iShares ETFs can help improve your long-term investment returns, allowing you to keep more of what you earn. Learn more about How asset location can help minimize taxes and maximize returns.

Whether at the grocery store, the mall or the gas station, a penny saved truly is a penny earned. The same is true when it comes to your investments.

Even small fees can have a big impact on your portfolio because not only is your balance reduced by the fee, you also lose any potential return you would have earned on the money used to pay the fee.³

For mutual funds, transaction fees may include sales loads (or sales charges) or redemption fees. These are paid directly by investors. ETFs typically cost less than comparable mutual funds (30% less on average).⁴

Buying an ETF is also more efficient than buying the same basket of securities individually. ETFs are widely available commission free on most online brokerage accounts as well as through financial advisors.

In all funds, there are two types of fees to watch: transaction fees and the fees included in the fund’s expense ratio.

The expense ratio is the fund’s annual fee, expressed as a percentage of assets. It typically includes the management fee and certain other fund expenses, and is reported in the fund’s prospectus.

In general, funds that pursue an active investment strategy will have higher expense ratios than passive funds.

Since fees vary so much across funds, investors should take time to understand all the fees associated with a fund they might purchase.

ETFs generally disclose their holdings on a daily basis. Mutual funds, on the other hand, generally disclose their holdings on a quarterly basis.

Having (near) real-time access to information about which stocks, bonds or other assets an ETF holds is one of the big benefits of the investment vehicle, and a clear difference to traditional mutual funds.

The right choice of ETF vs. mutual fund depends more on investor behavior and goals than on the fund label itself.

ETFs may appeal to newer investors seeking flexibility and simplicity.

ETFs may also support retirement investing strategies, particularly as brokerages expand automation features.

More active self-directed investors may prefer ETFs because of intraday trading flexibility and broader access to niche exposures.

Risk depends primarily on the underlying investments, not whether the fund is an ETF or mutual fund. An ETF tracking the S&P 500 carries similar risk to an S&P 500 index mutual fund.

Still, both ETFs and mutual funds have tradeoffs investors should understand before investing, such as management fees and expenses.

Potential ETF Drawbacks

• Intraday market-price fluctuations
• Trading discipline required
• Potential temptation to overtrade

Potential Mutual Fund Drawbacks

• Higher potential capital gains distributions
• Less trading flexibility
• Potentially higher expenses
• Minimum investment requirements
• End-of-day pricing only

ETFs and mutual funds both provide diversified access to financial markets and can support long-term investing goals.

The biggest differences often come down to taxes, costs, flexibility, and how investors prefer to manage their money.

At the end of the day, the answer to the 'ETFs vs. mutual funds' question comes down to your personal preference. The good news is both ETFs and mutual funds are widely available and — whether used alone or in combination — can help you pursue your investing goals.