The basics: what are they?
ETFs
Exchange-traded funds trade on stock exchanges like individual stocks. You can buy and sell them during market hours at market prices.
Examples: VTI, VOO, SPY, QQQ
Mutual funds
Mutual funds are priced once daily after markets close. You buy shares directly from the fund company.
Examples: VTSAX, FXAIX, SWTSX
Head-to-head comparison
| Feature | ETFs | Mutual funds |
|---|---|---|
| Trading | Anytime during market hours | Once daily after market close |
| Pricing | Real-time market price | End-of-day NAV price |
| Minimum investment | 1 share (often $50–300) | Often $1,000–3,000 |
| Expense ratios | Generally lower | Slightly higher |
| Automatic investing | Limited (some brokers offer it) | Easy and common |
| Tax efficiency | Generally more efficient | Less tax efficient |
ETF advantages
Lower expense ratios
ETFs typically have lower fees. For example, VTI has a 0.03% expense ratio against VTSAX at 0.04%. Over decades, that difference can be significant.
Lower minimum investment
Start with just one share. Useful for beginners who want to start small and build gradually.
Tax efficiency
ETFs are structured to minimise taxable distributions, which makes them more tax-efficient in taxable accounts.
Trading flexibility
Buy and sell during market hours, set limit orders, and see real-time prices. Useful for rebalancing or tactical adjustments.
Mutual fund advantages
Automatic investing
Easily set up automatic monthly investments — ideal for dollar-cost averaging without thinking about share prices or fractional shares.
Fractional shares
Invest exact dollar amounts. If you want to invest $500, you get exactly $500 worth of the fund, rather than being limited by the share price.
Simplicity
No need to worry about market timing, bid-ask spreads or intraday price movements. One price per day keeps it simple.
Automatic reinvestment
Dividends reinvest without any action needed, so compounding happens seamlessly.
Real-world examples
Let's compare popular index funds that track the same index.
S&P 500 index funds
VOO (ETF)
- Expense ratio: 0.03%
- Minimum: around $400 (1 share)
- Trades during market hours
- Tax efficient
VFIAX (mutual fund)
- Expense ratio: 0.04%
- Minimum: $3,000
- End-of-day pricing
- Auto-investing friendly
Total stock market funds
VTI (ETF)
- Expense ratio: 0.03%
- Minimum: around $250 (1 share)
- Real-time trading
- Most tax efficient
VTSAX (mutual fund)
- Expense ratio: 0.04%
- Minimum: $3,000
- Ideal for automation
- Fractional shares
You can compare the full cost and holdings detail for these in our index fund database.
Which should you choose?
The choice depends on your investment style and preferences.
Choose ETFs if you:
- Want the lowest possible fees
- Are starting with under $3,000
- Invest in a taxable account
- Don't mind investing manually
- Want trading flexibility
- Prefer real-time pricing
Choose mutual funds if you:
- Want automated investing
- Have $3,000 or more to start
- Prefer simplicity
- Invest in retirement accounts
- Want fractional shares
- Don't need intraday trading
Common misconceptions
The bottom line
The most important factor is starting to invest consistently, not whether you pick an ETF or a mutual fund. If you haven't opened an account yet, start with how to start investing, and model the numbers with the calculator to see what regular contributions do over time.