Trying to decide between ETFs and mutual funds? This guide breaks down the key differences to help you pick an investment type that helps you meet your goals.
Article: 7 minutes
Updated: October 16, 2026 Published: November 30, 2023
By: USAA Reviewed by: Editorial contributors
Exchange-traded funds, or ETFs, and mutual funds both offer diversified exposure to a range of investments. But they differ in how they’re traded, priced and sometimes taxed. Understanding these differences helps investors decide which fund type may fit their strategy and preferences.
Investing can be confusing. "Industry speak" tends to be filled with acronyms and complicated advice.
A common question: What's the difference between exchange-traded funds, or ETFs, and mutual funds?
Read on for similarities, differences and other factors to consider when choosing between these two investment options.
A mutual fund is a collection of investments. A mutual fund might include 2,000 stocks and bonds, for example. Since it's usually not affordable for a single investor to purchase that quantity of securities, mutual funds are a classic example of the benefits of diversification.
Much like a mutual fund, an ETF is a pooled investment that allows for diversification. It's also similar to a mutual fund in that it can be set up to track specific sectors, such as oil-producing companies, or even a specific index, like the S&P 500®.
Both allow the investor to hold a basket of underlying investments, like stocks or bonds that they may otherwise be unable to purchase. For example, if you have $2,000 to invest, you may not be able to buy enough individual stocks or bonds to properly diversify. With an ETF or mutual fund, you may be able to achieve diversification with a lower total investment.
Both can allow for professional management, could have low expenses and are available as index funds.
One of the big differences between ETFs and mutual funds is when they can be purchased. ETFs can be bought and sold throughout the trading day, like stocks, whereas mutual fund transactions occur once per trading day after the market closes when the mutual fund is priced.
To understand how that works, let's start by looking at how mutual funds are priced. At the end of each day, a mutual fund's net asset value, or NAV, is calculated by taking the value of all its assets minus liabilities and dividing that by the number of outstanding shares.
For example, let’s say that at market close, the value of the securities owned by the mutual fund is $100 million, and it has 5 million shares outstanding. If an investor purchases this mutual fund, they'd pay the NAV of $20 plus any purchasing costs.
Keeping with that same example, let’s say that the value of the underlying security increases to $105 million and still has the same 5 million shares at the end of the second day. Therefore, the NAV would increase to $21.
While a mutual fund sells at the next calculated NAV after the market closes, an ETF can trade at a premium or discount during market trading hours.
Let's say the value of the underlying assets of an ETF puts its value at $20, but it's currently selling for $20.50 on an exchange. In this case, it's selling at a premium and, if you want that particular ETF, you pay more due to supply or demand temporarily exceeding NAV. The opposite is referred to as "selling at a discount."
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With so many different mutual funds and ETFs out there, most people have no trouble finding one that aligns to their goals. Here are some of the most common ones.
Both mutual funds and ETFs can be actively or passively managed. Here's the difference:
At this point, a reasonable investor might ask: Why not choose an investment that is at least trying to outperform the market?
Over the short term, some actively managed funds can outperform the market. But over the long term, active management has historically tended to underperform passive investing.
It all comes down to the strength of the portfolio manager, the person doing the research and making the buy and sell decision, and the fact that none of us have a crystal ball. How good is the portfolio manager at identifying underpriced or undervalued stocks? Can they find those securities that will outperform the market, even when considering fees and taxes? Sometimes yes, sometimes no. Even Babe Ruth, as exhilarating as his home runs were, struck out more times than he knocked it out of the park.
Because even the savviest professional isn't error-proof, it's important for investors to do their own research.
Whether you purchase a mutual fund or an ETF, investing carries risk. In truth, you never know what the future holds, for the company and for the sector. Camera film stocks performed well for years, but you can imagine how they've done since the advent of the smartphone.
Even if a single company or sector continues to perform well, global risks are nearly impossible to predict. After the S&P 500® reached what was then its peak on Feb. 19, 2020, it plummeted approximately 34%, to 66% of its peak value, by March 23, as COVID-19 reached pandemic status.
Because markets by nature go up and down, it's important to invest according to your risk tolerance and risk capacity. One key part of this decision is to make sure you have a diversified portfolio.
Luckily, we have plenty of strategies and tools at our disposal when it comes to saving for short- and long-term goals.
One of the most important goals, for example, is having a fully stocked emergency fund. This helps through life's curveballs. Ideally, your emergency fund would be kept in an easily accessible account, like a savings account. A money market fund might also be a good place to keep your emergency fund or save for short-term goals, because you generally don’t want that money tied up in a high-risk investment or an account that you can’t readily access.
For longer-term goals like saving for retirement or a child’s education, a more growth-oriented equity fund might make more sense because they offer the potential for capital appreciation and compounding growth, which could help outpace inflation. While equity funds may experience more volatility, long-term savings generally have time to recover.
It depends on your strategy.
Some investors use strategies like dollar-cost averaging to invest frequently. This is the method of systematically investing shares regardless of price. This leads to purchasing more shares when prices decrease and less shares when prices increase. The goal is to help reduce the average cost of shares purchased over time and to develop a good habit of investing for the long haul.
Some investors might prefer mutual funds over ETFs because ETFs could incur trading costs and require a market order for every purchase, whereas mutual funds can be automatic.
On the other hand, if the investor is worried about taxes, they might prefer an ETF index fund over an actively managed mutual fund.
These are just a few of the considerations potential investors can take into account as they decide which option is best for their circumstances.
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