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ETFs vs. mutual funds: A comparison

You may be surprised by just how similar ETFs and mutual funds really are. Just a few key differences set them apart.

Similarities between ETFs & mutual funds

The biggest similarity between ETFs (exchange-traded funds) and mutual funds is that they both represent professionally managed collections, or "baskets," of individual stocks or bonds.

More traits that ETFs & mutual funds have in common

Both are less risky than investing in individual stocks & bonds

ETFs and mutual funds both come with built-in diversification.

One fund could include tens, hundreds, or even thousands of individual stocks or bonds in a single fund. So if 1 stock or bond is doing poorly, there's a chance that another is doing well. That could help reduce your risk—and your overall losses.

See how ETFs also help cut your costs

Both offer a wide variety of investment options

ETFs and mutual funds both give you access to a wide variety of U.S. and international stocks and bonds. You can invest broadly (for example, a total market fund) or narrowly (for example, a high-dividend stock fund or a sector fund)—or anywhere in between. It all depends on your personal goals and investing style.

At Vanguard, we offer more than 70 ETFs and 125 mutual funds.

Both are overseen by professional portfolio managers

ETFs and mutual funds are managed by experts. Those experts choose and monitor the stocks or bonds the funds invest in, saving you time and effort.

Although most ETFs—and many mutual funds—are index funds, the portfolio manager is still there to make sure the fund doesn't stray from its target index.

How a fund manager is different from a personal financial advisor

Both are commission-free at Vanguard

All Vanguard ETFs® and mutual funds can be bought and sold in your Vanguard Brokerage Account without paying any commission—ever.*

Differences between ETFs & mutual funds


If you prefer lower investment minimums …

ETFs

An ETF could be more suitable for you.

You can buy an ETF for the price of 1 share—commonly referred to as the ETF's market price. That price could be as little as $50 or as much as a few hundred dollars, depending on the ETF.

Estimate the total price of your ETF trade

MUTUAL FUNDS

A mutual fund may not be a suitable investment.

Mutual fund minimum initial investments aren't based on the fund's share price. Instead, they're a flat dollar amount.

Most Vanguard mutual funds have a $3,000 minimum.** That would buy you 30 shares of a hypothetical fund with a net asset value (NAV) of $100 per share.


If you want more hands-on control over the price of your trade …

ETFs

An ETF could be a suitable investment.

Not only do ETFs provide real-time pricing, they also let you use more sophisticated order types that give you the most control over your price.

If you want to keep things simple, that's OK! Just stick with a market order. It'll get you the best current price without the added complexity.

MUTUAL FUNDS

A mutual fund wouldn't be a suitable investment.

Regardless of what time of day you place your order, you'll get the same price as everyone else who bought and sold that day. That price isn't calculated until after the trading day is over.


If you want to repeat specific transactions automatically …

ETFs

An ETF wouldn't be a suitable investment.

You can't make automatic investments or withdrawals into or out of ETFs.

MUTUAL FUNDS

A mutual fund could be a suitable investment.

You can set up automatic investments and withdrawals into and out of mutual funds based on your preferences.


If you're looking for an index fund …

ETFs

An ETF could be a suitable investment.

Most ETFs are index funds (sometimes referred to as "passive" investments), including our lineup of more than 70 Vanguard ETFs.

MUTUAL FUNDS

A mutual fund could also be a suitable investment.

We also offer more than 50 Vanguard index mutual funds.

Learn how an active fund manager compares with a personal advisor

So what's the verdict?

"ETFs are the way to go!"

You're ready to move to the next step: deciding which ETFs to invest in.

"Mutual funds feel right for me."

You can just as easily get help deciding which mutual funds could help you meet your goals.

"I'd prefer a little of both."

No problem! You can easily split your investments between ETFs and mutual funds based on your investment goals.

Still not sure yet?

Open a brokerage account

Already have a Vanguard Brokerage Account?

We're here to help

If you're new to Vanguard:

Call 888-241-1395

Monday through Friday
8 a.m. to 8 p.m., Eastern time

If you're already a Vanguard client:

Call 888-992-8327

Monday through Friday
8 a.m. to 10 p.m., Eastern time

ALREADY OWN VANGUARD MUTUAL FUNDS OR ETFs SOMEWHERE ELSE?

Transfer them to a Vanguard Brokerage Account so you can enjoy commission-free trades.

REFERENCE CONTENT

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Diversification

A strategy intended to lower your chances of losing money on your investments.

Diversification can be achieved in many ways, including spreading your investments across:

  • Multiple asset classes, by buying a combination of cash, bonds, and stocks.
  • Multiple holdings, by buying many bonds and stocks (which you can do through a single ETF or mutual fund) instead of only 1 or a few.
  • Multiple geographic regions, by buying a combination of U.S. and international investments.
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Stock

Usually refers to a "common stock," which is an investment that represents part ownership in a corporation, like Apple, GE, or Facebook.

Each share of a stock is a proportional share in the corporation's assets and profits.

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Bond

Represents a loan given by you—the bond's "buyer"—to a corporation or a local, state, or federal government—the bond's "issuer."

In exchange for your loan, the issuer agrees to pay you regular interest and eventually pay back the entire loan amount by a specific date.

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Cut your costs with ETFs

Maybe you're thinking about handcrafting your portfolio. Before you do, make sure you understand the costs. (All examples below are hypothetical.)

Trading individual stocks

Imagine you want 25 different stocks in your portfolio, each of which is selling for $50 a share, and you're charged a $5 commission for each trade.

$1,250 purchase price (25 stocks multiplied by $50 per share)

+ $125 in commissions (25 stocks multiplied by $5 per stock)

= $1,375 total cost

Trading ETFs

An ETF can help you obtain the same level of diversification but at a much lower cost.

For example, imagine you buy 1 ETF that holds all 25 stocks and costs $50 a share, and you enjoy Vanguard's commission-free trading.

$50 purchase price (1 ETF multiplied by $50 per share)

+ $0 in commissions (for Vanguard ETFs® held in a Vanguard Brokerage Account)

= $50 total cost

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Sector fund

An ETF that invests in a specific industry, like energy, real estate, or health care.

Though sector ETFs have the potential to grow, you should be equally prepared for potentially large losses.

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How an active fund manager compares with a personal advisor

The manager of an actively managed fund is hired by the fund to use his or her expertise to try to beat the market—or, more specifically, to beat the fund's benchmark.

A personal financial advisor, on the other hand, is hired by you to manage your personal investments, which could include actively managed funds, index funds, and other investments. How "actively" your advisor monitors your accounts or buys and sells investments—daily, weekly, monthly, etc.—is based on the relationship you establish with your advisor.

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Commission

A fee that a broker or brokerage company charges every time you buy or sell a security, like an ETF or individual stock.

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Market price

The current, real-time price at which an ETF can be bought or sold. More specifically, the market price represents the most recent price someone paid for that ETF. You'll pay the full market price every time you buy more shares.

Unlike an ETF's or a mutual fund's net asset value (NAV)—which is only calculated at the end of each trading day—an ETF's market price can be expected to change throughout the day. (A mutual fund doesn't have a market price because it isn't repriced throughout the day.)

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Estimate the total price of your ETF trade

Simply multiply the current market price by the number of shares you intend to buy or sell.

How this is different from buying & selling mutual funds

With a mutual fund, you buy and sell based on dollars, not market price or shares. And you can specify any dollar amount you want—down to the penny or as a nice round figure, like $3,000.

With an ETF, you buy and sell based on market price—and you can only trade full shares. So you're more likely to see a dollars-and-cents amount, rather than a round figure.

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Minimum initial investment

The amount of money you'll need to make your first investment in a specific mutual fund. (ETFs don't have minimum initial investment requirements beyond the price of 1 share.)

After you meet the minimum, you can typically add as little as $1 at a time to the same mutual fund.

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Net asset value (NAV)

Represents the value of all of the securities and other assets held in an ETF or a mutual fund, minus its liabilities, divided by the number of outstanding shares.

Consider this hypothetical example:

Total fund assets: $1,100,000

Minus fund liabilities: $100,000

Equals the fund's net assets: $1,000,000

Divided by the number of outstanding fund shares: 10,000

Equals the fund's NAV: $100 per share

Both ETFs and mutual funds calculate NAVs. However, unlike an ETF's market price—which can be expected to change throughout the day—an ETF's or a mutual fund's NAV is only calculated once per day, at the end of the trading day.

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Real-time pricing

Just like an individual stock, the price of an ETF can change from minute to minute throughout any trading day. The price you pay or receive can therefore change based on exactly what time you place your order. This is sometimes referred to as "intraday" pricing.

On the other hand, a mutual fund is priced only at the end of the trading day. Regardless of what time you place your trade, you and everyone else who places a trade on the same day (before the market closes that day) receives the same price, whether you're buying or selling shares.

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Order type

When buying and selling ETFs, you can typically choose from 4 order types—just like you would when trading individual stocks:

  • Market order. This is the most basic order type. A market order will typically be completed almost immediately at a price that's close to the current market price.
  • Limit order. This is generally used when you want to maximize your profits. When buying ETF shares, you'd typically set your limit below the current market price (think "buy low"). When selling ETF shares, you'd typically set your limit above the current market price (think "sell high").
  • Stop order. This is generally used when you want to minimize your losses but aren't able to stay on top of minute-to-minute changes in an ETF's market price. When buying ETF shares, you'd typically set your stop price above the current market price (think "don't buy too high"). When selling ETF shares, you'd typically set your limit below the current market price (think "don't sell too low").
  • Stop-limit order. This is even more specific than a stop order. The stop price triggers the order; then the limit price lets you dictate exactly how high is too high (when buying shares) or how low is too low (when selling shares).
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Market order

An order to buy or sell an ETF at the best price currently available. In most circumstances, the trade will be completed almost immediately at a price that's close to the current quoted market price.

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Automatic investment & withdrawal

An optional service that lets you pick a frequency—monthly, quarterly, or annually—along with a date and a dollar amount to move into or out of a specific investment on a repeat basis. Think of this as a "set it and forget it" way to make consistent investments.

For example, some investors want to make sure they max out their IRA contributions every year. But they prefer to spread the contributions over the course of the year, and they don't want to forget a transaction by accident.

So instead of putting all the money in at once, they set up monthly or quarterly purchases that happen automatically—no logon or phone call required. Just constant savings!

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Index fund

An ETF or a mutual fund that attempts to track the performance of a specific index (sometimes referred to as a "benchmark")—like the popular S&P 500 Index, Nasdaq Composite Index, or Dow Jones Industrial Average.

An index fund buys all or a representative sample of the bonds or stocks in the index that it tracks.

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Actively managed fund

An ETF or a mutual fund that attempts to beat the market—or, more specifically, to outperform the fund's benchmark.

While an index fund is attempting to track a specific index, an actively managed fund employs a professional fund manager to hand-select the specific bonds or stocks that will be included in the fund in an attempt to outperform an index. So the manager's research, forecasting, expertise, and experience are critical to the fund's performance.

However, an actively managed fund can just as easily underperform its benchmark, meaning you could lose money on your investment.

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Total market fund

An ETF or a mutual fund that invests in U.S. or international bonds or stocks at the broadest level.

"Total bond" funds invest in a combination of short-, intermediate-, and long-term bonds with varying degrees of credit quality and risk.

"Total stock" funds invest in a combination of small, mid-size, and large companies with varying degrees of value (meaning they focus on paying dividends) and growth (meaning they focus on increasing the price of their stock).

Total market funds typically follow an indexing strategy—choosing a broad market index that tracks the entire bond or stock market and investing in all or a representative sample of the bonds or stocks in that index.

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How a fund manager is different from a personal financial advisor

A fund manager is hired by the ETF to watch over which stocks or bonds are included in the ETF.

A financial advisor is hired by you to manage your personal investments, which could include ETFs, mutual funds, individual securities, or other investments.