Educational content only. This article is for informational purposes and does not constitute personalized financial, tax, or investment advice. Consult a qualified professional for guidance specific to your situation.
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For the purposes of the average investor, there is virtually no difference between an exchange traded fund (ETF) and mutual fund. Both are financial instruments that can be used to track different indexes.
In the what to invest in section, I recommend purchasing mutual funds, not because they're superior but because mutual fund purchases can be automated at Schwab, Fidelity, and Vanguard and cannot for ETFs.
However, there are some key differences, primarily in terms of how they trade:
ETFs trade during normal trading hours (i.e., 9:30a-4p ET) while mutual fund trades execute once a day in the evening. The order for a mutual fund must be placed before the market closes for it to execeute the same day.
Brokers will charge you a fee for purchasing a mutual fund that's been constructed by another firm but no fees for purchasing mutual funds if its been constructed in-house. For example, if I attempt to purchase Vanguard's VTSAX or Fidelity's FSKAX in my Schwab account, Schwab will charge me a $50 transaction fee but will charge no fees for Schwab's SWTSX.
ETFs can trade freely, similar to stocks: I can purchase a Vanguard ETF in my Schwab brokerage account with no fees (though this cannot be automated). However, because the major brokerages all offer mutual products that track the major indexes, this shouldn't cause any issues (for example, VTSAX, SWTSX, and FSKAX have near identical performance because all aim to track the Dow Jones U.S. Total Stock Market Index).
Mutual funds often have minimum investment requirements. For example, VTSAX has a $3,000 minimum initial investment. However, ETFs can be purchased for the price of a single share, which might be more accessible for new investors with limited capital.
For most long-term, buy-and-hold investors, I recommend mutual funds for one primary reason: automation. Being able to set up automatic investments on a regular schedule helps maintain investment discipline and takes emotion out of the equation.
If you're with Schwab, use Schwab mutual funds like SWTSX. If you're with Fidelity, use Fidelity funds like FSKAX. If you're with Vanguard, use Vanguard funds like VTSAX. This way, you avoid transaction fees while still getting essentially the same market exposure.
Remember that for most investors, the slight differences between ETFs and mutual funds are less important than consistently investing, keeping costs low, and maintaining a properly diversified portfolio.
Whether you're figuring out which fund to pick in your brokerage or trying to set up recurring investments, I can walk you through the full setup. One-time consultation, no ongoing fees.
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What to Invest In