Skip to main content

Making the decision: ETF or mutual fund?

Use this guided Q&A to help you decide whether an ETF or a mutual fund better suits your investing style.

Explore the 4 key differences

Although ETFs (exchange-traded funds) and mutual funds have far more similarities than differences, some of those differences could affect your choice.

Do you prefer lower investment minimums?

Expand all

Collapse all

Yes

An ETF could be more suitable for you because you can start investing in an ETF for the price of 1 share (commonly referred to as the ETF's market price).

The market price of 1 share 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

On the flip side, a mutual fund typically has a minimum initial investment that's unrelated to its share price. Most Vanguard mutual funds have a $3,000 minimum.*

No

Either an ETF or a mutual fund could be suitable for you if you're not focused on lower minimums.

An ETF's minimum is based solely on the price of 1 share (its market price), which 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

A mutual fund's minimum ignores the price per share and is based instead on a flat dollar amount.

Most Vanguard 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.

Do you want more hands-on control over the price of your trade?

Expand all

Collapse all

Yes

An ETF could be more suitable for you because of its real-time pricing. ETFs also let you use more sophisticated order types that give you the most control over your price.

If you've ever traded stocks and dealt with these order types, you're good to go!

If you haven't, that's OK—you can still invest in an ETF. You have 2 choices:

  • Make things easier. When asked to choose an order type, consider sticking with a market order. That will get you the best current price without the added complexity.
  • Familiarize yourself with order types. Take some time to learn about each specific order type and how it can be used to your advantage.

No

Either an ETF or a mutual fund could be suitable for you.

With an ETF, you'll still benefit from real-time pricing. If you aren't interested in different order types or don't have the time to learn, consider sticking with a market order. That will get you the best current price without the added complexity.

Or you can invest in a mutual fund, which has just 1 price per day and no specific order types.

Do you want to repeat specific transactions automatically?

Expand all

Collapse all

Yes

A mutual fund could be more suitable for you if you want to set up automatic investments or withdrawals.

An ETF, on the other hand, doesn't offer this service.

No

Either an ETF or a mutual fund could be suitable for you if you aren't interested in making automatic investments or withdrawals.

Are you looking for an index (a.k.a., "passive") fund?

Expand all

Collapse all

Yes

Either an ETF or a mutual fund could be suitable for you because both offer index fund alternatives.

In fact, most ETFs are index funds, as are many mutual funds, including our lineup of nearly 70 Vanguard index ETFs and more than 65 Vanguard index mutual funds.

No

A mutual fund could be more suitable for you—particularly because Vanguard doesn't currently offer actively managed ETFs.

You can select from a broad array of actively managed mutual funds that cover a variety of stock and bond markets, including international and sector-specific investments.

Learn how an active fund manager compares with a personal financial advisor

And don't worry—this isn't an all-or-nothing decision. Many investors start with index funds and then add actively managed funds as their portfolio grows and they can afford to take a bit more risk.

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.

Open a brokerage account

Already have a Vanguard Brokerage Account?

We're here to help

DEFINITION OF AN ETF

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

Layer opened.

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.)

Layer opened.

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.

Layer opened.

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.

Layer opened.

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.

Layer opened.

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.

Layer opened.

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).
Layer opened.

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.

Layer opened.

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!

Layer opened.

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.

Layer opened.

How an active fund manager compares with a personal financial 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 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.

Layer opened.

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.

Layer opened.

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).
Layer opened.

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.

Layer opened.

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.)

Layer opened.

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.

Layer opened.

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.

Layer opened.

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!