Investing can feel like navigating a maze with countless options and paths. Among the most popular choices are Exchange-Traded Funds (ETFs) and mutual funds.
Both offer a way to diversify your portfolio, but they come with distinct features, benefits, and drawbacks. In this guide, we’ll break down the difference between ETFs and mutual funds for beginners, explore their pros and cons, and help you decide which might be the better fit for your financial goals and investment strategy.
Questions to ask when comparing an ETF vs mutual fund
→ What is an ETF vs mutual fund, and why does the management style matter?
→ Do the costs of active management actually pay off over the long term?
→ How does an ETF compare to an index fund vs how it compares to a mutual fund?
→ ETF vs mutual fund, which is better for a European investor building long-term wealth?
Disclaimer
This is a marketing communication and in no way should be viewed as investment research, investment advice, or recommendation to invest. The value of your investment can go up as well as down. Past performance of financial instruments does not guarantee future returns. Investing in financial instruments involves risk; before investing, consider your knowledge, experience, financial situation, and investment objectives.
In this guide to ETFs vs mutual funds
- Key differences between ETFs and mutual funds in management, cost, and trading
- ETF vs mutual fund performance and whether paying more could pay off
- Gold ETF vs gold mutual fund compared
What is an ETF vs mutual fund?
ETFs are a basket of different investments, such as stocks or bonds, all packed into one. Imagine you want to buy a little piece of a bunch of different companies without picking each one individually. That’s what an ETF does for you.
ETFs follow the performance of a specific market index or sector, meaning they mirror the composition of the index they track. If the index goes up, so does the value of your ETF, and vice versa. These funds are typically passively managed, meaning they do not have active managers making investment decisions. You can buy and sell ETFs on stock exchanges throughout the day, just like individual company stocks, offering flexibility and real-time pricing.
Mutual funds are similar in that they also allow you to invest in a mix of assets, but they work a bit differently. Instead of being traded on the stock exchange like ETFs, you buy mutual fund shares directly from the fund company. The mutual fund pools money from many investors to buy a diversified portfolio of stocks, bonds, or other securities.
A professional manager handles all the buying and selling of investments within the fund. The price you pay for a share in a mutual fund is determined once a day at the end of the trading day, based on the total value of all the assets in the fund, known as the Net Asset Value (NAV). This means you can’t trade mutual funds throughout the day like you can with ETFs.
Difference between ETFs and mutual funds
The key differences will help you understand the benefits of ETFs vs. mutual funds so that you can make informed investment decisions.
Feature | ETFs | Mutual funds |
Trading | Traded on stock exchanges throughout the day | Bought and sold at the end of the trading day at NAV |
Pricing | Prices fluctuate during market hours | Price determined once daily based on NAV |
Management style | Typically passively managed (track an index) | Can be actively or passively managed |
Expense ratios | Generally lower | Can be higher, especially for actively managed funds |
Minimum investment | Often as low as a single share | May have higher minimum investment requirements |
Tax efficiency¹ | Can be more tax-efficient in some jurisdictions | Less tax-efficient due to more frequent capital gains distributions |
Liquidity | High, with real-time trading | Limited to end-of-day transactions |
Transparency | Holdings often disclosed daily | Holdings disclosed quarterly |
¹ Tax treatment varies by jurisdiction and personal circumstances. This table is for informational purposes only and does not constitute tax advice.
ETF vs mutual fund performance: Could paying more pay off?
The most important question in the ETF vs mutual fund comparison is not about trading mechanics or tax. It is about whether the higher cost of active management delivers higher returns.
What a fee difference could look like over 20 years
An investor who puts €10,000 into an ETF with a 0.1% TER and another €10,000 into a mutual fund with a 1% TER will pay €10 vs €100 in fees in year one. Over 20 years, assuming both deliver the same gross return of 7% annually, the mutual fund investor would pay approximately €3,800 more in cumulative fees than the ETF investor.²
² Illustrative example only. Assumes a constant 7% gross annual return on a €10,000 lump sum over 20 years, before taxes. Projections are not a reliable indicator of future performance. Actual returns will vary, and the value of an investment can fall below the total amount contributed.
Active management and the potential cost of outperformance
Active management could add value in certain markets, at certain times, and with certain managers. But the broad pattern across available industry data is that a majority of actively managed funds have underperformed their benchmark index over longer periods. The funds that do outperform in one period are not reliably the same ones that outperform in the next.
This does not mean active management never works. But for an investor comparing ETF vs mutual fund returns over a long-term horizon, the lower-cost passive ETF has a potential structural advantage: it keeps more of the gross return because less is consumed by fees.
- Lower fees could compound in the investor’s favor over time
- Active outperformance is possible but not consistent
- Past performance is not a reliable indicator of future results
- Capital is at risk in both vehicles
Gold ETF vs gold mutual fund
For investors who want gold exposure, the ETF vs mutual fund comparison applies with some gold-specific nuances.
Gold ETFs
A gold ETF tracks the price of gold, usually by holding physical gold bullion or gold futures. It trades on an exchange, so an investor can buy or sell at a live price during market hours. TERs for gold ETFs are generally low, often in the 0.1%–0.4% range.
Gold mutual funds
A gold mutual fund may hold physical gold, gold futures, or shares in gold mining companies, depending on the fund’s mandate. It is priced once daily at the NAV and is more likely to be actively managed, which means higher fees. Some gold mutual funds also blend gold exposure with other commodities or precious metals, making the exposure less pure than a straightforward gold ETF.
The deciding factors between gold ETFs and gold mutual funds
The choice between a gold ETF vs gold mutual fund comes down to the same core factors as the broader comparison: cost, trading flexibility, and whether an investor wants passive gold-price exposure or an actively managed gold-related portfolio.
Choosing between an ETF and a mutual fund
Deciding between an ETF and a mutual fund depends on individual financial goals, investment style, and the characteristics that matter most to each investor. Both vehicles carry advantages and risks, and neither is suited to every situation.
- Financial goals
Deciding between an ETF and a mutual fund depends on individual financial goals, investment style, and the characteristics that matter most to each investor. Both vehicles carry advantages and risks, and neither is suited to every situation.
- Cost considerations
Comparing expense ratios, trading fees, and potential tax implications is a practical first step. ETFs often have lower costs, but the full picture depends on the specific funds and how often an investor trades.
- Flexibility
Investors who want the ability to trade throughout the day or need more control over execution timing may prefer ETFs. Investors comfortable with once-daily pricing may not see this as a factor.
- Management style preference
Some investors prefer a passive approach, where the investment simply tracks an index. Others want a professional manager making active decisions. Neither approach guarantees a particular outcome.
- Tax efficiency
Tax treatment can differ between ETFs and mutual funds depending on jurisdiction and fund structure. Investors should verify how each vehicle is treated under their own local tax rules before committing. This does not constitute tax advice.
ETFs vs. mutual funds for long-term investment: Returns, risk, and cost considerations
When comparing mutual funds vs. ETFs returns, it is essential to consider the nature of the funds. Historically, actively managed mutual funds aim to outperform the market, though not all succeed. In contrast, ETFs, being passively managed, typically match the performance of their underlying index. This produces results that follow the index, for better or worse.
ETFs vs. mutual funds risk is another crucial factor to consider. Both types of investments carry inherent risks, including market risk, liquidity risk, and management risk. While ETFs often benefit from diversification and passive management, reducing certain risks, they can still be susceptible to market fluctuations and liquidity issues, especially in less commonly traded funds. Mutual funds also carry market risk, and the active management involved can introduce additional risks depending on the fund manager’s decisions.
ETFs vs. mutual funds liquidity is an important consideration for investors. ETFs offer high liquidity, as they can be bought and sold throughout the trading day, similar to individual stocks. This flexibility is advantageous for investors who may need to access their funds quickly. In contrast, mutual funds are typically only transacted at the end of the trading day at the fund’s net asset value (NAV), which may limit flexibility in accessing funds.
When investing in ETFs vs. mutual funds, investors must weigh the factors of returns, risk, expense ratios, and liquidity. ETFs generally offer lower costs and index-tracking returns but with potential liquidity and market risks. Mutual funds provide access to professional management and a broader range of strategies but may come with higher costs and risks depending on the fund’s management style.
How to start with commission-free ETFs on Mintos
The infrastructure around ETF investing has changed over the past decade. Regulated platforms now offer the kind of provider range, transparency, and low entry points that were once reserved for larger investors.
Mintos (AS Mintos Marketplace) is an investment platform licensed by Latvijas Banka that lets you invest in ETFs popular with European investors¹, your way. Commission-free ETF investing means €0 Mintos fees to buy, hold, or sell, whether investing in individual ETFs or through the Core ETFs portfolio.
Individual ETFs
Take full control and select your own ETFs from €1. With over 1,000 ETFs from recognized providers such as iShares, Vanguard, Amundi, and Xtrackers, you can build the ETF portfolio that fits your goals.3
✔️Popular ETFs from recognized providers³
✔️Automated regular investing with Investment plan (coming soon)
✔️Commission-free: €0 to buy, hold, or sell²
² Each ETF carries its own annual fee (Total Expense Ratio) charged by the ETF provider, built into the ETF price.
³ ETF providers shown for illustrative purposes only. This does not constitute a recommendation or investment advice. Based on frequently searched ETFs among European investors on justETF.com
Core ETFs portfolio
An automated ETF portfolio matched to your risk level, from €50. The Core ETFs portfolio builds a globally diversified mix of stock and bond ETFs, automatically rebalanced and reinvested so you do not need to manage it yourself.
✔️Globally diversified portfolio of ETFs, equities, and bonds
✔️Automatically rebalanced and reinvested
✔️Commission-free: €0 to buy, hold, or sell²
As with any investment, the value of ETFs can go down as well as up, and you may receive back less than you invested.
Developed by the Mintos Content Team, making investment knowledge accessible for everyday investors across Europe.
Frequently asked questions
What is the difference between an ETF and a mutual fund?
An ETF is usually a passive, low-cost fund that tracks an index and trades on an exchange throughout the day. A mutual fund is often actively managed, priced once a day, and charges higher fees for that active management.
ETF vs mutual fund, which is better?
Neither is universally better. ETFs are cheaper, more flexible to trade, and passive. Mutual funds offer active management at a higher cost. Over the long term, lower costs are a meaningful advantage, but the right choice depends on individual goals and preferences.
Which is better for the long term, an ETF or a mutual fund?
For long-term investors, the lower ongoing cost of passive ETFs is a significant factor, since fees compound over time. ETF vs mutual fund, which is better for long-term investing often comes down to how much the investor is willing to pay in fees over decades.
Are ETFs safer than mutual funds?
Neither is inherently safer. Both carry the market risk of their holdings. The differences between ETFs and mutual funds are in cost, management style, and trading, not in a guarantee of safety. Capital is at risk in both.
What is the difference between a gold ETF and a gold mutual fund?
The choice between a gold ETF vs gold mutual fund depends on cost, trading flexibility, and whether the investor wants passive gold-price exposure or an actively managed gold-related portfolio.
What is the difference between an ETF, a mutual fund, and an index fund?
ETFs and index funds are both usually passive index trackers. A mutual fund is often actively managed and higher-cost. See the dedicated ETF vs index funds to learn more.
