Cats vs. dogs.
Waxing vs. shaving.
Clooney vs. Pitt.
In the grand battles of personal preferences, what about mutual funds vs. exchange-traded funds (ETFs)? (Yes, we’d also rather talk Clooney and Pitt, but, hey, this is an investing column.)
At first, the differences seem subtle: Both are pooled investments. Buy one share of an S&P 500 index mutual fund or an ETF, and you just bought a tiny slice of the same 500 companies.
But closer examination reveals some differences:
- Most ETFs track an index. With mutual funds, 96% are actively managed, according to Morningstar, meaning a fund manager picks the investments it holds.
- ETFs are generally cheaper. The average expense ratio for U.S. ETFs is 0.6%, compared with 1.3% for mutual funds. Costs also vary depending on what, if any, commissions you pay when buying or selling.
- Mutual funds are less nimble. If you buy mutual fund shares, you get the end-of-day price. With ETF shares, you get the intraday market price.
- Mutual funds are less transparent. Mutual funds typically report their holdings quarterly. With ETFs, you can always see what they’re holding.
The winner? Your call. Overall, the low fees of ETFs are appealing. If going with a pricier mutual fund, make sure you believe you’ll get better performance.
Hatfields vs. McCoys: Are you on Team ETF or Team Mutual Fund?