Economy

Last edited Sat Apr 20, 2024, 04:59 AM - Edit history (1)

It used to be that almost all ETFs were index funds, while most mutual funds were actively managed funds. But there have been mutual fund index funds since the 70's. And a growing proportion of ETFs are actively managed.

Actively managed means that an individual or team tries to pick the best stocks to buy and sell, and so tend to be more expensive (higher expense ratio) than index funds where they work to match what's in the benchmark they are indexing.

Examples (both are S&P 500 index funds at Vanguard):

VOO - an ETF - Expense Ratio: 0.03% https://investor.vanguard.com/investment-products/etfs/profile/voo#overview
3 year performance: 11.42% (annualized)

VFIAX - A mutual fund - Expense Ratio: 0.04% https://investor.vanguard.com/investment-products/mutual-funds/profile/vfiax#overview
3 year performance: 11.44% (annualized)

Unfortunately, I can't find the expense ratio to more than single significant digits accuracy, but even if they are indeed 0.01% difference, that's $1 per $10,000 invested per year.

Personally I prefer mutual funds over ETFs because I like that the former are bought and sold at Net Asset Value (NAV), whereas an ETF trades at a varying premium or discount to NAV. But I own both mutual funds and ETFs.

One should use limit orders to purchase or sell ETFs as their price can swing considerably during the day above and beyond changes in the underlying NAV. ETFs are traded throughout the trading day, sometimes resulting in sizable bid-ask spreads, particularly for the smaller more specialized ETFs.

OTOH, ETFs have some tax advantages as they aren't forced to distribute capital gains as much as mutual funds are. I'm not clear how that works, but I don't doubt that's the situation.

For funds held within retirement accounts like 401k's and IRA's (both traditional and Roth), there is no difference between the two as far as taxes.