Let’s connect
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
An asset manager’s ultimate goal is to choose the right investment vehicle that financial advisors and investors will actually want to use. The best products can solve real investor problems while covering gaps in exposure.
When it comes to packaging these solutions, asset managers have two core investment options: exchange-traded funds (ETFs) or mutual funds. Each wrapper comes with distinct advantages, but understanding the key differences is essential for bringing the most value to investors.
These are the nine strategic considerations every asset manager should use when comparing an ETF vs mutual fund – including what they have in common and how each is beneficial for investment strategies.
ETFs and mutual funds have plenty in common – after all, they’re both baskets of securities. Let’s take a look at where they overlap:
They allow investors to build a diversified portfolio containing multiple assets, without having to buy individual stocks.
They offer liquidity. However, ETFs are often a more liquid product due to their unique trading mechanisms, which reflect how individual stocks are traded.
They provide opportunities to customize a portfolio based on investment strategy, risk tolerance, and investment goals.
They are subject to regulatory oversight.
While it can depend on a person’s investment style and particular investment objectives, portfolios are likely to include a combination of both types of investment vehicles.
Most portfolios rely on having an array of investments across different asset classes. The 60/40 portfolio (60% equities, 40% fixed income) has been a long-running standard, but market uncertainty sometimes gives rise to alts like commodities and REITs. Both ETFs and mutual funds can offer exposure to equities, fixed income, or alts.
Check out: Best practices for launching an ETF
The ETF has seen a boom in recent years. What began as a niche product has become mainstream, as financial advisors and investors are more aware of the advantages the ETF wrapper delivers.
Advantages include:
Below, we take a closer look at each of the five advantages to learn why some investors prefer ETFs over mutual funds.
Because ETFs trade like stocks, they offer enormous trading flexibility. By contrast, mutual funds trade only once per day at a fixed price. ETFs allow intraday trading, giving investors the ability to buy and sell on their own schedule rather than being locked into end-of-day pricing.
ETFs started as index funds, which meant they didn’t require active management and could maintain lower expense ratios than mutual funds.
While actively managed ETFs have emerged and become an increasingly popular option, they still tend to have lower costs than their mutual fund counterparts.
This cost advantage persists because ETFs’ structural efficiencies and investor expectations for lower management fees keep expenses down across the entire category.
ETFs typically create lower tax liabilities than mutual funds due to their unique structure and trading patterns. ETFs tend to hold their investments longer, generating fewer taxable capital gains.
Additionally, when ETF investors want to sell shares, they trade with other investors on the exchange rather than forcing the fund to sell underlying holdings.
By contrast, mutual funds must sell securities more frequently to meet redemption requests, creating capital gains distributions that get passed on to all shareholders.
Mutual funds typically require minimum investments. While some brokers now offer fractional mutual fund shares, this isn’t universally available.
ETFs eliminate this barrier entirely: investors can buy a single ETF share for the current market price, making them far more accessible to investors with smaller account balances.
ETFs generally offer greater transparency than mutual funds. Most ETFs disclose their complete holdings daily, giving investors a real-time view of exactly what they own. This transparency helps investors better understand the fund’s net asset value (NAV) and make more informed trading decisions.
Mutual funds face no such disclosure requirements and typically reveal holdings only quarterly. Some mutual fund managers deliberately keep their strategies confidential to prevent competitors from copying their positions.
You might like: 7 tips for cost-efficient ETF operations
ETFs may be gaining popularity, but mutual funds are not without their advantages and still have an important role to play in an investor’s portfolio. As of 2024, 56% of American households have mutual funds in their portfolios, according to the Investment Company Institute.
Mutual fund benefits include:
Professional fund management
No bid-ask spreads
Automatic investing
No trading commissions
Next, let’s review these four key advantages to understand why some investors prefer mutual funds to ETFs.
While both ETFs and mutual funds offer actively managed options, mutual funds have a longer track record in active management. A skilled portfolio manager can add significant value, particularly during market uncertainty and when making strategic investment decisions about broader market conditions.
Unlike index funds that must track their benchmark regardless of market conditions, active managers can adapt their strategy in real time based on changing circumstances. This flexibility allows them to potentially protect against volatility, pursue rebalancing opportunities, and maximize returns when possible.
Although passive mutual funds exist, most mutual funds employ active management. This brings both the potential benefits and higher costs that come with professional oversight.
ETFs have intraday trading advantages, but mutual funds’ once-daily pricing can actually benefit investors in certain situations. Mutual funds eliminate bid-ask spreads entirely: every investor buys and sells at the exact same net asset value (NAV) calculated at the end of the day when the market closes.
This uniform pricing protects investors from the trading costs and timing pressures that ETF investors face throughout the day. While intraday flexibility creates opportunities for skilled traders, it can also lead to costly mistakes that mutual funds’ simplified structure helps investors avoid.
Mutual funds tend to have the ability for investors to set up automatic investment plans for dollar-cost averaging, supporting long-term financial planning. Generally speaking, ETFs don’t allow for automatic investing.
Automatic investing is a huge perk, as it is a significant benefit for people looking to invest for the long term. This is one reason why mutual funds have become an important vehicle for retirement planning rather than short-term tactical trades.
A no-load index mutual fund can be ideal for investors who are making routine deposits, as they are sold without a commission or a sales charge.
Another advantage of mutual funds is the absence of trading commissions, unlike many ETFs that still charge these fees. Combined with automatic investing capabilities, this makes mutual funds particularly cost effective for long-term investors. Without commission fees eroding returns on each transaction, investors can focus on building wealth rather than managing trading costs.
Use these nine strategic considerations to help you decide which wrapper is ideal for each of your investors. While ETFs might seem like the natural evolution of the mutual fund, each investment vehicle serves specific investor needs.
Rather than viewing one as superior, asset managers who recognize the strengths of both ETFs and mutual funds can build better, diverse product lineups that appeal to more investors with different financial goals.
VettaFi helps asset managers at every stage of the product life cycle. If you’re interested in developing an ETF or a mutual fund, talk to one of the experts from our index team or digital marketing team today.
An asset manager’s ultimate goal is to choose the right investment vehicle that financial advisors and investors will actually want to use. The best products can solve real investor problems while covering gaps in exposure.
When it comes to packaging these solutions, asset managers have two core investment options: exchange-traded funds (ETFs) or mutual funds. Each wrapper comes with distinct advantages, but understanding the key differences is essential for bringing the most value to investors.
These are the nine strategic considerations every asset manager should use when comparing an ETF vs mutual fund – including what they have in common and how each is beneficial for investment strategies.
ETFs and mutual funds have plenty in common – after all, they’re both baskets of securities. Let’s take a look at where they overlap:
They allow investors to build a diversified portfolio containing multiple assets, without having to buy individual stocks.
They offer liquidity. However, ETFs are often a more liquid product due to their unique trading mechanisms, which reflect how individual stocks are traded.
They provide opportunities to customize a portfolio based on investment strategy, risk tolerance, and investment goals.
They are subject to regulatory oversight.
While it can depend on a person’s investment style and particular investment objectives, portfolios are likely to include a combination of both types of investment vehicles.
Most portfolios rely on having an array of investments across different asset classes. The 60/40 portfolio (60% equities, 40% fixed income) has been a long-running standard, but market uncertainty sometimes gives rise to alts like commodities and REITs. Both ETFs and mutual funds can offer exposure to equities, fixed income, or alts.
Check out: Best practices for launching an ETF
The ETF has seen a boom in recent years. What began as a niche product has become mainstream, as financial advisors and investors are more aware of the advantages the ETF wrapper delivers.
Advantages include:
Below, we take a closer look at each of the five advantages to learn why some investors prefer ETFs over mutual funds.
Because ETFs trade like stocks, they offer enormous trading flexibility. By contrast, mutual funds trade only once per day at a fixed price. ETFs allow intraday trading, giving investors the ability to buy and sell on their own schedule rather than being locked into end-of-day pricing.
ETFs started as index funds, which meant they didn’t require active management and could maintain lower expense ratios than mutual funds.
While actively managed ETFs have emerged and become an increasingly popular option, they still tend to have lower costs than their mutual fund counterparts.
This cost advantage persists because ETFs’ structural efficiencies and investor expectations for lower management fees keep expenses down across the entire category.
ETFs typically create lower tax liabilities than mutual funds due to their unique structure and trading patterns. ETFs tend to hold their investments longer, generating fewer taxable capital gains.
Additionally, when ETF investors want to sell shares, they trade with other investors on the exchange rather than forcing the fund to sell underlying holdings.
By contrast, mutual funds must sell securities more frequently to meet redemption requests, creating capital gains distributions that get passed on to all shareholders.
Mutual funds typically require minimum investments. While some brokers now offer fractional mutual fund shares, this isn’t universally available.
ETFs eliminate this barrier entirely: investors can buy a single ETF share for the current market price, making them far more accessible to investors with smaller account balances.
ETFs generally offer greater transparency than mutual funds. Most ETFs disclose their complete holdings daily, giving investors a real-time view of exactly what they own. This transparency helps investors better understand the fund’s net asset value (NAV) and make more informed trading decisions.
Mutual funds face no such disclosure requirements and typically reveal holdings only quarterly. Some mutual fund managers deliberately keep their strategies confidential to prevent competitors from copying their positions.
You might like: 7 tips for cost-efficient ETF operations
ETFs may be gaining popularity, but mutual funds are not without their advantages and still have an important role to play in an investor’s portfolio. As of 2024, 56% of American households have mutual funds in their portfolios, according to the Investment Company Institute.
Mutual fund benefits include:
Professional fund management
No bid-ask spreads
Automatic investing
No trading commissions
Next, let’s review these four key advantages to understand why some investors prefer mutual funds to ETFs.
While both ETFs and mutual funds offer actively managed options, mutual funds have a longer track record in active management. A skilled portfolio manager can add significant value, particularly during market uncertainty and when making strategic investment decisions about broader market conditions.
Unlike index funds that must track their benchmark regardless of market conditions, active managers can adapt their strategy in real time based on changing circumstances. This flexibility allows them to potentially protect against volatility, pursue rebalancing opportunities, and maximize returns when possible.
Although passive mutual funds exist, most mutual funds employ active management. This brings both the potential benefits and higher costs that come with professional oversight.
ETFs have intraday trading advantages, but mutual funds’ once-daily pricing can actually benefit investors in certain situations. Mutual funds eliminate bid-ask spreads entirely: every investor buys and sells at the exact same net asset value (NAV) calculated at the end of the day when the market closes.
This uniform pricing protects investors from the trading costs and timing pressures that ETF investors face throughout the day. While intraday flexibility creates opportunities for skilled traders, it can also lead to costly mistakes that mutual funds’ simplified structure helps investors avoid.
Mutual funds tend to have the ability for investors to set up automatic investment plans for dollar-cost averaging, supporting long-term financial planning. Generally speaking, ETFs don’t allow for automatic investing.
Automatic investing is a huge perk, as it is a significant benefit for people looking to invest for the long term. This is one reason why mutual funds have become an important vehicle for retirement planning rather than short-term tactical trades.
A no-load index mutual fund can be ideal for investors who are making routine deposits, as they are sold without a commission or a sales charge.
Another advantage of mutual funds is the absence of trading commissions, unlike many ETFs that still charge these fees. Combined with automatic investing capabilities, this makes mutual funds particularly cost effective for long-term investors. Without commission fees eroding returns on each transaction, investors can focus on building wealth rather than managing trading costs.
Use these nine strategic considerations to help you decide which wrapper is ideal for each of your investors. While ETFs might seem like the natural evolution of the mutual fund, each investment vehicle serves specific investor needs.
Rather than viewing one as superior, asset managers who recognize the strengths of both ETFs and mutual funds can build better, diverse product lineups that appeal to more investors with different financial goals.
VettaFi helps asset managers at every stage of the product life cycle. If you’re interested in developing an ETF or a mutual fund, talk to one of the experts from our index team or digital marketing team today.
