Why ETFs are Kind of Better than Mutual Funds

People often think that mutual funds and exchange-traded funds (ETFs) are pretty much the same thing. You know, since they both have the word “fund” in them and all.

Same difference right?

In reality…they’re two very different things. ETFs and mutual funds are both vehicles designed to make it easier to invest – and although ETFs and mutual funds do share a bunch of qualities – it’s important to understand their significant differences. Let’s talk about why ETFs are just…kind of better than mutual funds.

Even though mutual funds and ETFs share similar traits, there are differences between the two that make ETFs stand out as the superior choice.

1. Flexible Trading Process

 ETFs have greater flexibility than mutual funds within the trading process.


Sales and purchases of a mutual fund take place directly between investors and the fund, and the price of said fund is not determined until the end of the business day, when the NAV (Net Asset Value) is determined.

On the other hand, an ETF behaves similarly to a stock and its shares trade throughout the day between investors just like any other stock. ETFs allow you to trade on the major stock exchanges at anytime during the trading day. Their prices will fluctuate throughout the day, just like a share of Google or Apple, but mutual fund shares are priced once a day after the markets close.

The key difference is that you can only buy a mutual fund at the NAV price set at the end of each business day. This is what we’d call a “true price” and because of that there’s not much room for making smart trades. It’s much harder to find an undervalued mutual fund than an ETF, simply because of the way prices are set for the different instruments.

2. Lower fees 

The fees you will pay on an ETF are going to be much lower than those of most mutual funds.

There’s a reason for that, of course. ETFs are generally passively managed, or managed by a computer, while mutual funds can have active management. You have to pay extra for that!

ETF fees range from 0.10% on the low end to 1.25% at the high end. Mutual fund fees can be as low as 0.2% and as high as 2%.

That doesn’t sound like too much of a difference…but the problem is this: the fees on mutual funds don’t stop there. See, that range we quoted merely takes care of what’s called an expense ratio (i.e. mutual fund fee). The mutual fund industry is notorious for hiding other costs under layers of financial jargon. The average investor doesn’t even know to look for them, and they definitely aren’t told that the fees are being applied. They just don’t realize how much money they’re being taken for.

In addition to the expense ratio, there are what’s called “loads”. A load is a fee that you pay for the privilege of having someone sell you the mutual fund. A front-end load is applied when you buy the mutual fund and a back-end load is a fee that is applied when you sell the fund. These can be as high as 5%.

You need to watch out for fees, as they eat into your investment returns with zero remorse. By choosing an ETF over a mutual fund you can make sure that you’re saving more for retirement and not just giving away your money via sales commissions.

Because ETFs don’t have to manage hundreds of customers, they have lower fees that translate into higher returns for you. Be careful, though, because the costs of trading an ETF can more than offset the initial advantage of an ETF’s lower expense ratio. Because of that, an ETF will be the most cost-effective choice for those who use discount brokers, invest a large amount of money, and hold on for the long-term.

3. Reliable Performance

If there’s one major advantage in favor of ETFs, it would be that the variance of the performances between ETFs is lower than that of mutual funds. Put another way, mutual funds are all over the shop when it comes to performance. They can go really low or really high. ETFs tend to perform within a tighter range.

A lot of this is, again, due to the fact that ETFs are passively managed while mutual funds have humans at the helm. Some of those humans are amazing at their jobs, some are lucky and some are just plain bad.


4. Tax-efficiency

ETFs are far more tax-efficient than mutual funds.

Because they’re not churning their portfolios in search of better stocks, ETFs don’t run up a lot of capital gains that must be distributed. Think about it, as a manager of a mutual fund, you have to find a way to justify your fee. It’s unfashionable to buy and hold, so these active managers will buy and sell many stocks over the lifetime of your investment.

This turnover generates capital gains. Every time you sell a stock and the price has gone higher you’ve made money. According to the law, if a fund builds up capital gains, then it must pay them out to shareholders at the end of the year.

As passively managed portfolios, ETFs and index funds tend to realize fewer capital gains than actively managed mutual funds. They are more tax-efficient for this reason. If you don’t sell the ETF share then there are no capital gains.

The big difference here is that you hold the power.

You now have a better idea as to why ETFs are often considered better than mutual funds. ETFs cost you less, give you more control and are way more transparent than shadowy mutual funds that make it very hard for the average investor to make decent returns.

Maybe this was more than you ever wanted to know about the differences between ETFs and mutual fund but it certainly doesn’t hurt to be informed. After all, knowledge is power.


January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)

One response to “Why ETFs are Kind of Better than Mutual Funds”