ETF vs Mutual Fund

ETF vs Mutual Fund

ETF vs Mutual Fund – what should I invest in? the question looms in the mind of every investor. Here we will cover the key similarities and differences between ETFs and Mutual Funds so that you can decide what works better for you.

You can also choose to have a hybrid strategy and allocate some portion of your portfolio to mutual funds, and some to ETFs. We will also go through the list of the top 25 mutual funds (with inception dates before the year 2000) and their average annualized returns since inception.

Similarities in ETFs and Mutual Funds

There are two main similarities between ETFs and Mutual Funds

• Both ETFs and Mutual Funds are a basket of assets and due to this they have some inherent diversification and are relatively less risky than investing in individual stocks.
• Both ETFs and Mutual Funds offer a wide variety of investment options in a particular sector (e.g. technology, pharmaceuticals), geography (e.g. emerging markets), asset type (e.g. stocks or bonds) etc.

ETF vs Mutual Fund: Key Differences

The key differences between ETFs and Mutual Funds are listed below.

[tables best viewed in landscape mode if on a mobile device]

ETFs	Mutual Funds
No minimum threshold for investing in ETFs. With the partial share feature, you can even invest as low as $1 in ETFs now.	Generally, Mutual Funds have a threshold investment defined, for example, most Vanguard mutual funds require a $3000 minimum investment.
You can buy ETFs at real-time market prices	You can buy mutual funds at the price determined at the end of the trading day.
When trading ETFs, you can place ‘limit orders’, ‘stop’ orders, etc.	Advanced order types are not available on Mutual Funds
You can ‘short’ sell ETFs	Selling ‘short’ is not an option with Mutual Funds
You can trade derivatives such as call options and put options on ETFs	Call and Put Options on Mutual Funds are not available
The aim of index ETFs is to track the performance of an index such as the S&P 500	Actively managed mutual funds aim to beat their benchmark index (i.e. get better returns than the index itself)
With ETFs, you can invest in a particular niche such as Artificial Intelligence.	Mutual Funds don’t offer niche-specific products.
ETFs can be traded like stocks via Robinhood, Webull, M1 finance apps	Mutual Funds are not available on these investing apps and can be purchased directly from the companies that created the fund.
ETFs disclose their holdings (stocks, bonds, or other assets held by the fund) daily.	Mutual funds offer less transparency – mutual funds disclose their holdings quarterly.

ETF vs Mutual Fund: Other Differences

• Most ETFs are passively managed, although some actively managed ETFs also exist.
• Mutual Funds are mostly actively managed by the fund managers, although some index mutual funds are also available.
• ETFs tend to have lower fees, as low as 0.0% in some cases. (However, it is possible that the fees can increase in the future).
• Actively managed mutual funds tend to have higher fees. Even if in short term the fund manager beats the index, it is uncommon to see mutual funds beating the index, taking the higher fees into account, in the long term.
• ETFs are more tax-efficient. The investor is only responsible for capital gains tax when he or she sells the ETF for a profit.
• Mutual Funds (unless held in a tax-advantaged account such as 401(k) ) may pass on the capital gains taxes to the fund investors even if the investor never sold units (shares) of the mutual fund.

ETF vs Mutual Fund Comparison: S&P 500 Index

Vanguard Products: VFIAX vs VOO

Index Fund: Vanguard 500 Index Fund Admiral Shares (VFIAX)

This was the industry’s first index fund for individual investors. The fund is well-diversified and has exposure to multiple industries and represents about 75% of the U.S. stock market. If your 401(k) plan offers this fund, a 0.04% expense ratio might be one of the lowest in the market.

• Expense Ratio: 0.04%
• Minimum initial investment: $3000

(Check out other options too – Fidelity FXAIX @ 0.015% and Schwab SWPPX @ 0.02% have low fees as well)

ETF: Vanguard S&P 500 ETF (VOO)

The VOO ETF comes in slightly cheaper at a 0.03% expense ratio, and with easy tradability via a broker and a lower threshold for investment VOO might be a better option for starter investors.

• Expense Ratio: 0.03%
• Minimum Initial Investment: $303 (price of one share, as of Nov 2, 2020)

Pro Tip: You can invest as little as $1 by buying fractional shares on Robinhood and other apps that support partial share transactions.

Best Mutual Funds 2020 – Long Term Performance

Here’s a list of the top 25 Mutual Funds, with inception dates before the year 2000, ranked according to their annualized return since inception. (updated Dec 2020).

[tables best viewed in landscape mode if on a mobile device]

Fund	Ann. Return	Inception
Wasatch Micro Cap (WMICX)	17.73%	1995
Fidelity Select Software & IT Services (FSCSX)	16.87%	1985
AllianzGI Technology Institutional (DRGTX)	16.21%	1995
Vanguard Health Care Investor (VGHCX)	16.09%	1984
Fidelity Select Health Care (FSPHX)	16.06%	1981
Fidelity Magellan (FMAGX)	15.99%	1963
T. Rowe Price Communications & Technology Investor (PRMTX)	15.99%	1993
PGIM Jennison Health Sciences Z (PHSZX)	15.82%	1999
Fidelity Select Medical Technology and Devices (FSMEX)	15.48%	1998
BlackRock Health Sciences Opportunities Investor A (SHSAX)	15.36%	1999
Delaware Smid Cap Growth A (DFCIX)	15.20%	1986
T. Rowe Price Health Sciences Investor’s (PRHSX)	15.13%	1995
Nuveen Small Cap Growth Opportunities I (FIMPX)	14.85%	1995
Fidelity Growth Company (FDGRX)	14.78%	1983
Columbia Seligman Communications & Information A (SLMCX)	14.72%	1983
Fidelity OTC (FOCPX)	14.67%	1984
Fidelity Select Retailing’s (FSRPX)	14.64%	1985
Columbia Acorn Institutional (ACRNX)	14.46%	1997
Kinetics Internet No Load (WWWFX)	14.44%	1996
Fidelity Select IT Services (FBSOX)	14.20%	1998
T. Rowe Price Mid-Cap Growth Investor (RPMGX)	14.08%	1992
American Funds The Growth Fund of America A (AGTHX)	14.01%	1973
Fidelity Select Leisure’s (FDLSX)	13.90%	1984
Vanguard PRIMECAP Investor (VPMCX)	13.80%	1984
Sequoia (SEQUX)	13.75%	1970

Popular Mutual Funds for Investing in Large Cap, Small Cap, Technology, and Real Estate funds.

Here is a list of some popular mutual funds, their investment style, and expense ratios.

ETF vs Mutual Fund – Is There an Easy Choice?

ETF: For the average investor, the advantage of tax efficiency, more investment options, lower threshold, ease of trading on investment apps, etc. put ETF a favorite option.

Mutual Fund: Other investors who trust the fund managers to beat the market and are willing to pay a higher fund management fee to find mutual funds as a great investment option. As seen in the list of top 25 mutual funds, investors have bagged great returns on mutual funds as well.

Availability may limit the choices: In many retirement accounts (employers’ 401(k) plans), ETFs may not be available and mutual funds might be the only option available for employees to invest in. However, ETFs can be purchased on investing apps such as Robinhood, M1, and Webull.

Our Financial Calculator Apps

---