ETFs vs. mutual funds: A comparison

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.

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.

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).

Understand the benefits & risks of different order types

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.

Understand the benefits & risks of different order types

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.

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.

Protect yourself through diversification

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.

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.

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 online 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

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.

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.

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.

Commission

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

Review our complete commission & fee schedules

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.

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.

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.)

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.

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.

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!

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.

Learn more about the benefits of index funds