Mutual Funds vs. ETFs: Which Is Right For You?

2026 | Investing for Growth Client Conversations

There are key differences that can shape how investors use each.

Key Points

Mutual funds and ETFs both offer the promise of diversification,* professional management, and the potential for less overall risk vs. individual stocks and bonds.

Unlike mutual funds, ETFs can be bought and sold during the trading day, like stocks and bonds.

Your financial professional can help you decide if either mutual funds, ETFs, or some combination of the two is right for you.

Investing for Growth

You've Inherited an IRA. What Are Your Options?

Distribution rules come down to which of three beneficiary types best describes you.

Anyone who loves to cook can tell you that bananas and plantains may look alike but are not the same thing. The same could be said for mutual funds and exchange‑traded funds (ETFs).

Mutual funds and ETFs both pool investor assets into diversified portfolios, offering professional management and potential risk reduction vs. individual securities. Even so, the way they’re structured—and how investors use them—can differ meaningfully.

While the word “fund” does appear in both descriptions, ETFs are also called “exchange-traded” due to the ability to buy and sell shares any time of day when exchanges are open. As for which investment vehicle is best for your portfolio, well, it depends.

What Type of Investor Are You?
There are important distinctions you’ll want to understand as you contemplate each product type. Trading preferences, access to asset classes, costs, transparency of underlying holdings, and your tax situation are among the areas you’ll need to understand to help decide which investment type is best for you.

Here are some questions you’ll want to ask yourself:

Am I the type of investor who prefers to buy and sell shares at any hour of the trading day? If “yes,” we think you sound like an ETF candidate.

Do I need access to certain actively managed asset classes? Close call. Once rare, actively managed ETFs are now widely available.

Are low trading costs a major goal? Another close call, but let’s go with ETFs, unless you like to trade a lot and have to pay a commission for each trade.

Am I hoping to potentially minimize the tax impact of year-end capital-gains distributions? ETFs, generally!

What if I’m just looking to fund my 401(k) plan at work? Mutual funds were once the obvious choice. Nowadays, ETFs can exist within retirement accounts. But beware of making frequent trades that can weaken returns over time.

The table shown in FIGURE 1 can help you determine whether mutual funds, ETFs, or a combination of both, are best for you.

Investing for Growth

You've Inherited an IRA. What Are Your Options?

Distribution rules come down to which of three beneficiary types best describes you.

FIGURE 1

Comparing Mutual Funds and ETFs

Consider mutual funds if you value ...	Consider ETFs if you value ...
Variety: More than 7,700 mutual funds¹ offer virtually unlimited options for different investment strategies, risk-tolerance levels, and asset classes. No brokerage account is required.	Intraday trading flexibility: The biggest ETF advantage comes from your ability to buy and sell ETF shares any time of the day. A brokerage account is required.
Active management: The mutual-fund market offers a broad range of actively managed strategies. While most ETFs are passively managed, the number of actively managed ETFs continues to grow.	Transparency: Most ETFs are required to disclose their holdings on a daily basis, although a variant known as “nontransparent ETFs” aren’t required to do this; mutual funds only disclose their full holdings on a quarterly basis.
Service quality: Mutual-fund issuers often provide a wealth of services, such as phone support, commission-free exchanges within the fund family, and check-writing privileges.	Pricing control: Share prices fluctuate all day. ETF investors can trade on minute-by-minute price changes, while mutual funds are priced only at the end of the trading day.
Automatic investment options: Regular investment contributions are easy to set up, so you can add to your portfolio with minimal effort.	Lower trading costs: ETFs, traded solely through brokerage accounts, generally have lower recordkeeping costs and licensing fees, but frequent trades could result in high trading costs through commissions.
Fractional share ownership: Say you’ve got $1,000 to invest and after the closing bell you learn that your favorite mutual fund is priced at $51 per share. How many shares can you buy? Exactly 19.6 shares. Over time, fractional ownership can help build your wealth faster. Mutual funds traditionally offered this option, but more and more brokerages now allow fractional ETF purchases.	Sophisticated trading strategies: Because ETFs trade like stocks, you can use limit or stop-loss orders, write options against them, short them, or buy them on margin.²
Retirement-plan options: Employer-based 401(k) plans or self-managed IRAs still offer a vast array of mutual funds. That said, more and more ETFs are finding a home inside retirement accounts.	Tax efficiency: ETFs are created and redeemed through an innovative process that helps them trade efficiently on exchanges. This process helps to minimize taxable distributions.

ETFs: More Flexibility, Lower Investment Minimums
ETFs were designed to give investors greater flexibility over when trades occur. Unlike mutual funds, which are priced once per day, ETF shares trade throughout the day on exchanges and can be bought or sold using a variety of order types.

If you prefer lower investment minimums, you can start investing in an ETF for the price of one share, which may range from tens to hundreds of dollars per share. By contrast, some mutual funds impose minimum initial investment requirements unrelated to the share price, with minimums typically ranging from $1,000–$3,000.

ETFs are also considered by many investment experts to be more tax efficient. The reasons for this are somewhat technical, as they involve the mechanics of the ETF creation and redemption process.

Mutual Funds Are Widely Owned
Mutual funds continue to play a central role in investor portfolios. For starters, there are more than 7,700 mutual funds to choose from that cover hundreds of investment strategies, risk tolerance levels, and asset classes. In 2025, an estimated 123 million individual Americans in 73 million households owned mutual funds.³

One reason for their enduring popularity is that they can help investors build good savings habits. By taking advantage of automatic investment options, a mutual fund investor can easily buy shares on a recurring basis (i.e., dollar-cost averaging)⁴ to help systematically build wealth over time.

Some investors also value the certainty of end‑of‑day pricing, which ensures all mutual-fund investors receive the same execution price. ETF prices, by contrast, can vary during the day based on market activity and order type.

Mutual Funds or ETFs: Why Not Both?
So which type of investment is best for you? Let’s get back to asking those questions, the most important of which are these: What are my short-, medium-, and long-term investment goals? What is my tolerance for risk? What about my time horizon or need for investment flexibility? What about tax efficiency?

Consider mutual funds for:

Sheer variety of asset classes, strategies, and risk levels

Automatic investment plans and systematic withdrawal plans

Phone support, check-writing, and other fund-provider services

Consider ETFs for:

Access to intraday trading
Generally lower fees
Tax efficiency

Your financial professional can help you work through the questions and the myriad of options and flavors—a process not much different than deciding between bananas and plantains for the summer fruit salad you’re making.

To learn more about investing in mutual funds and ETFs, please talk to your financial professional.

^* Diversification does not ensure a profit or protect against a loss in a declining market.

¹ Source: Investment Company Institute, “2025 Annual Report to Members,” 8/31/25.

² A stop-loss order is an order placed with a broker to buy or sell once the stock reaches a certain price and is designed to limit an investor’s loss on a security position. An option is a security that represents the right to buy or sell a specified amount of an underlying security at a specified price within a specified time. A limit order instructs the floor broker to buy a specified security below a certain price or to sell a specified security above a certain price. Buying securities on margin occurs when a brokerage firm lends the customer part of the purchase price of securities. Short selling involves the selling of a security that the seller obtained with borrowed funds.

³ Source: Investment Company Institute, “Profile of Mutual Fund Shareholders, 2025.”

⁴ A dollar-cost averaging strategy involves regular, systematic share purchases made over time, regardless of the rise or fall of prices. Investors can build wealth by accumulating a relatively greater number of shares for a fixed amount when prices decline, and fewer shares for the same fixed amount when prices are rising. Dollar-cost averaging does not guarantee that your investments will make a profit nor does it protect you against losses when stock or bond prices are falling. You should consider whether you would be willing to continue investing during a long downturn in the market, because dollar-cost averaging involves making continuous investments regardless of fluctuating price levels.

Important Risks: Investing involves risk, including the possible loss of principal. Option-writing or margin trading aren’t suitable for every investor. These strategies involve risk, including the possibility that you could lose more money than you invest. A fund’s or ETF’s focus on investments in particular sectors may increase its volatility and risk of loss if adverse developments occur

All information provided is for informational and educational purposes only and is not intended to provide investment, tax, accounting or legal advice. As with all matters of an investment, tax, or legal nature, you and your clients should consult with a qualified tax or legal professional regarding your or your client’s specific legal or tax situation, as applicable. The preceding is not intended to be a recommendation or advice.

This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice.

CCWP067 5490313