ETFs or Mutual Funds: What Is the Best Choice?

Andrei Paulavets
Investment professional with a strong engineering background, leveraging machine learning and generative AI to enhance investor financial analysis and data-driven decision-making in financial markets.

Introduction

Choosing the right investment vehicle is crucial for any investor, and two of the most common options are Exchange-Traded Funds (ETFs) and mutual funds. Both of these offer diversification, convenience, and a range of investment choices. However, there are key differences between the two that can significantly impact an investor’s strategy and returns.

Similarities

At a high level, both ETFs and mutual funds are investment funds, meaning they pool money from multiple investors to invest in a diversified portfolio of assets. These can range from stocks, bonds, commodities, or a mix of different asset types. Both also offer professional management (though there are also passively-managed versions of each), and a simple way for individual investors to achieve a broad-based exposure to the markets.

Differences

Despite these similarities, ETFs and mutual funds differ significantly in several ways:

  1. Trading: The most significant difference lies in how these funds are traded. ETFs are traded on an exchange, just like individual stocks. Their prices fluctuate throughout the day based on supply and demand. In contrast, mutual funds are bought and sold at the net asset value (NAV) price at the end of the trading day.
  2. Pricing: Due to their different trading mechanisms, ETF prices can deviate from their NAV during the trading day, although this is typically minimal for most popular ETFs. Mutual funds, on the other hand, are always transacted at the NAV, which reflects the underlying value of the assets in the fund.
  3. Minimum Investment: Many mutual funds require a minimum investment, which can range from a few hundred to several thousand dollars. ETFs, in contrast, have no minimum investment beyond the cost of one share plus any brokerage commissions.
  4. Fees: ETFs generally have lower expense ratios than actively-managed mutual funds. However, since ETFs are traded like stocks, you may have to pay a brokerage commission for each trade. Conversely, mutual funds can be purchased without a trading fee, but they often carry higher management fees.

Pros and Cons

ETFs:

  • Pros: ETFs offer flexibility in trading, potential tax efficiency, lower expense ratios, and no minimum investment requirement. They also provide transparency, as their holdings are disclosed daily.
  • Cons: Brokerage commissions can add up if you trade frequently. Also, bid-ask spreads can impact costs, especially for less liquid ETFs.

Mutual Funds:

  • Pros: Mutual funds allow for automated investments and withdrawals, making them suitable for regular saving plans. They also offer the ability to purchase fractional shares, which can be useful for smaller investors.
  • Cons: Mutual funds often have higher expense ratios, may require a minimum investment, and do not offer intraday trading.

Register & Get Data

Funds and EODHD data:

Our API provides End-of-Day, Intraday, and Fundamental data for ETFs.

You can search for the list of ETFs using our Screener API or filter out the list of tickers for exchange by type using data provided by our Exchanges API.

You can check an example of the Fundamentals API output for the Vanguard Total Stock Market Index Fund (VTI.US) using the following URL request:

https://eodhistoricaldata.com/api/fundamentals/VTI.US?api_token=demo

You can find data for mutual funds under the exchange code EUFUND, to get the list of tickers you can use the following API request:

https://eodhistoricaldata.com/api/exchange-symbol-list/EUFUND?api_token=YOUR_API_KEY&fmt=json

You can get historical End-of-Day data for tickers using our End-of-Day API:

https://eodhistoricaldata.com/financial-apis/api-for-historical-data-and-volumes/

Register & Get Data

Conclusion

ETFs and mutual funds both have their strengths and potential drawbacks. The choice between them largely depends on the individual investor’s strategy, objectives, and personal preferences. For instance, a more active trader might prefer the flexibility of ETFs, while a more passive investor might prefer the convenience and simplicity of mutual funds.

It’s important to thoroughly understand the implications of each before making a decision. As with any investment, conducting in-depth research and potentially consulting with a financial advisor can help ensure you make the best choice for your individual needs and goals.