What they have in common
The SEC's investor bulletin of April 2025 lists the similarities: both are investment companies registered with the SEC, with a prospectus available free from EDGAR or the fund; both pool many investors' money into one portfolio; both are typically managed by SEC-registered advisers; both can diversify across many companies; both are liquid; both can have low minimum investments; both can follow a passive index strategy or an active one; and both charge fees whatever the fund's performance.
Where they differ
| Mutual funds | ETFs | |
|---|---|---|
| Buying and selling | bought from the fund or through an intermediary; sold back to the fund | bought and sold only on a national stock exchange; you need a brokerage account |
| Price | net asset value per share, typically calculated at the end of each business day; you learn the price after the close | market price throughout the trading day, which can be above or below NAV (a premium or discount) |
| Fees | management and other fees from fund assets; some charge fees directly for buying, selling or exchanging, and share classes differ in fees | management and other fees from fund assets; generally no direct purchase or sale fees, but broker commissions may apply |
| Taxes in a taxable account | capital gains distributions are taxable | capital gains distributions are taxable, but in-kind exchanges typically mean fewer of them |
| Taxes in a 401(k) or IRA | no tax difference, the SEC says | |
The SEC's earlier ETF bulletin adds that ETF expense ratios have historically often been lower than those of corresponding mutual funds, and that many ETFs disclose their holdings daily, beside the quarterly disclosure required of all mutual funds.
What the differences mean in practice
- Timing. A mutual fund order placed at 10 a.m. fills at that evening's NAV; an ETF order fills at the market price at that moment.
- Fees. Add every fee for the fund you are considering: the expense ratio, any sales charge or redemption fee, and any trading commission. The guide investment fees and expense ratios shows what a fee difference costs over decades, and the compound interest calculator runs it for any amount.
- Account type. In an IRA or 401(k), the tax-efficiency difference disappears; in a taxable account, capital gains distributions add to the yearly tax, as dividend yield vs total return explains for dividends.
- The name is not enough. The SEC notes you cannot always tell from a fund's name whether it is a mutual fund or an ETF; the investment strategy section of the prospectus says.
Both kinds of holdings at a brokerage fall under SIPC protection if the firm fails, which does not cover market losses. This guide follows the SEC's investor bulletins and is not investment advice.
Frequently asked questions
What is the difference between a mutual fund and an ETF?
Mainly how they are bought, sold and priced, per the SEC. Mutual fund shares are bought from the fund, or through an intermediary, and sold back to it at the net asset value calculated at the end of each business day. ETF shares are bought and sold only in market transactions on a national stock exchange, at market prices that change during the trading day and can be above or below the net asset value.
Are ETFs cheaper than mutual funds?
Often in some respects. The SEC says both charge management fees and other expenses deducted from fund assets; mutual funds may also charge fees directly for buying, selling or exchanging shares, while ETFs generally do not but carry broker commissions on each trade. The SEC's earlier bulletin adds that ETF expense ratios have historically often been lower than for corresponding mutual funds. The total of all fees is what matters.
Are ETFs more tax efficient?
In a taxable account, often. The SEC explains that because many ETFs buy and sell portfolio securities through in-kind exchanges rather than for cash, they typically have fewer capital gains distributions than mutual funds. Inside a tax-advantaged account such as a 401(k) or IRA, the SEC says there is no tax difference.
Do I need a brokerage account to buy an ETF?
Yes. The SEC says you need a brokerage account to buy, sell and hold ETF shares, while mutual fund shares can be held directly with the fund. A broker or investment adviser may help with both.
Is an index fund a mutual fund or an ETF?
Either. The SEC says both can follow a passive strategy that seeks roughly the return of a particular index, typically called index funds, or an active strategy managed to an investment objective. You cannot always tell a fund's type from its name; the prospectus's investment strategy section says which it is.
Sources
- SEC Investor Bulletin: Characteristics of Mutual Funds and Exchange-Traded Funds (ETFs), April 29, 2025 (similarities: SEC registration and prospectus, pooled investments, professional management, diversification, liquidity, low minimums, passive or active strategy, fees, no tax difference in tax-advantaged accounts; differences: how bought and sold, how priced at NAV or market price, how fees are charged, tax efficiency in taxable accounts)
- SEC Investor Bulletin: Exchange-Traded Funds (ETFs), August 2012 (ETF shares trade at market prices that may or may not equal NAV; index-based and actively managed ETFs; expense ratios for ETFs often historically lower than for corresponding mutual funds; in-kind redemptions and tax efficiency; read the summary and full prospectus)
General information based on the sources above, not tax, legal or financial advice.