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.
How to invest
ETFs vs. mutual funds: A comparison
You may be surprised by how similar ETFs and mutual funds are. Just a few key differences set them apart.
More traits that ETFs & mutual funds have in common
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.
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 80 ETFs and 160 mutual funds.
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 managers are still there to make sure the funds don't stray from their target indexes.
How a fund manager is different from a personal financial advisor
All ETFs and Vanguard mutual funds can be bought and sold online in your Vanguard Brokerage Account without paying any commission—ever.*
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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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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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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 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.
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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.
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. Depending on the ETF, that price could be as little as $50 or as much as a few hundred dollars.
Estimate the total price of your ETF trade
Check current prices for all Vanguard ETFs®
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, but 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 may not 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 may not 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 nearly 70 Vanguard index ETFs.
Mutual funds
A mutual fund could also be a suitable investment.
We also offer more than 65 Vanguard index mutual funds.
Compare index funds vs. actively managed funds
Learn how an active fund manager compares with a personal advisor
Differences between ETFs & mutual funds
| ETFs | Mutual funds | |
If you prefer lower investment minimums… |
An ETF could be more suitable for you. You can buy a Vanguard ETF for as little as $1. Non-Vanguard ETFs can be purchased for as little as the cost of one share. |
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… |
An ETF could be a suitable investment. Not only do ETFs provide real-time pricing, but 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. |
A mutual fund may not 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… |
An ETF may not be a suitable investment. You can't make automatic investments or withdrawals into or out of ETFs. |
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… |
An ETF could be a suitable investment. Most ETFs are index funds (sometimes referred to as "passive" investments), including our lineup of more than 80 Vanguard index ETFs. |
A mutual fund could also be a suitable investment. We also offer more than 160 Vanguard index mutual funds. Compare index funds vs. actively managed funds Learn how an active fund manager compares with a personal advisor |
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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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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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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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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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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.
Whether you prefer ETFs or mutual funds (or both!), be sure to check out:
Our list of mutual funds
You're ready to decide which mutual funds you want to invest in.
Our tools: Find an asset allocation that best fits you
You're ready to decide which mutual funds you want to invest in.
Take our investor questionnaire to find the right balance of stocks and bonds for your portfolio based on your goals and risk tolerance. You can also view how 9 model portfolios have performed in the past.
TRAITS WE HAVEN'T COMPARED YET
What about comparing ETFs vs. mutual funds when it comes to performance? Risk? Expense ratios? Taxes?
Comparing these and other characteristics makes good investing sense. But unfortunately, it's not as easy as categorically comparing "all ETFs" to "all mutual funds."
For example, if you compare a stock ETF with a bond mutual fund, the ETF-vs.-mutual-fund comparison isn't as important. What matters is that each invests in something completely different and, therefore, behaves differently.
Instead, compare 1 specific fund with another.
Compare up to 5 specific ETFs or mutual funds
For more information about Vanguard funds or ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
*Commission-free trading of Vanguard ETFs applies to trades placed both online and by phone. Commission-free trading of non-Vanguard ETFs excludes leveraged and inverse ETFs and applies only to trades placed online; most clients will pay a commission to buy or sell non-Vanguard ETFs by phone. It also excludes leveraged and inverse ETFs, which can't be purchased through Vanguard but can be sold with a commission. Commission-free trading of non-Vanguard ETFs also excludes 401(k) participants using the Self-Directed Brokerage Option; see your plan's current commission schedule. Vanguard Brokerage reserves the right to change the non-Vanguard ETFs included in these offers at any time. All ETFs are subject to management fees and expenses; refer to each ETF's prospectus for more information. Account service fees may also apply. All ETF sales are subject to a securities transaction fee. See the Vanguard Brokerage Services® commission and fee schedules for full details.
**Vanguard Target Retirement Funds and Vanguard STAR® Fund have a $1,000 minimum. Most other Vanguard funds have a $3,000 minimum. Some Vanguard funds have higher minimums to protect the funds from short-term trading activity. Fund-specific details are provided in each fund profile.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.