Mutual Fund vs. ETF, What is the Difference?

To most investors the differences between an ETF and mutual fund aren’t readily apparent.  They both hold selections of individual investment securities; however, there are important distinctions in how they are constructed and how they trade.  Selecting one over the other depends on several factors including time horizon, tax considerations and investment strategy.

To most investors, the differences between an ETF and mutual fund aren’t readily apparent.  They both hold selections of individual investment securities, however, they are constructed differently and trade differently.  Selecting one over the other depends on several factors including time horizon, tax considerations and investment strategy.
​

• Mutual funds trade at the end of the day, while ETFs trade intra-day. Executing a trade for an ETF is similar to trading a stock.  If an investor wants to try to buy an ETF at a certain price they can do so but not with mutual funds as those are purchased and sold at the end-of-day price. 
• On average, ETFs often have slightly lower expense ratios than mutual funds.  That is because ETFs are primarily structured to mirror an index while many mutual fund managers are trying to beat an index.
• Unlike mutual funds, ETFs do not have to distribute any realized capital gains each year.  An investor will eventually have to pay the capital gains when they sell their ETF but they are able to postpone paying taxes on the gain until they are ready to sell. 
• An ETF portfolio makes sense if you are going for a pure index portfolio in a taxable account.  The ETF advantage disappears for IRA accounts because an investor doesn’t pay taxes on capital gains in those accounts.
• At Mosaic Fi while we tend to hold our positions for the long-term, we will re-balance portfolios as market movement causes exposures to move out of their target ranges.  While investors are protected from capital gains distributions (in a taxable account) if they own an ETF vs. a mutual fund, they would still be exposed to capital gains taxes when parts of an ETF position are sold off.
• The growth in the ETF market has all been during a strong bull market.  The structure/market reaction has not been fully tested in a sustained bear market.  In fact, in August of 2017 during a period of significant volatility when the Dow dropped close to a 1,000 points in one day, there were several instances where investors sold their ETFs for 20-30% below their inherent value because of the lack of liquidity in the market and the nature of how an ETF trades.  

 
​Just like mutual funds, ETF’s can be an efficient strategic tool in an asset allocation.
For additional information or questions, call Jenifer Aronson at 773-425-6790.