ETFs Vs. Mutual Funds: What You Need to Know
5 Min Read | Last updated: July 10, 2026
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The ETF vs. mutual fund debate persists. From management styles, fees, and taxes, learn how each fund differs and when to choose one over the other.
At-A-Glance
- Mutual funds and exchange-traded funds (ETFs) are investments that can diversify your financial portfolio and potentially make you money, and you can invest in one or both.
- Mutual funds are usually actively managed and can outperform the market in the short term, but they can be more expensive than ETFs.
- ETFs are usually passively managed, perform better than actively managed mutual funds in the long run, and are often less costly to maintain.
If you’re beginning your investing journey, you may be wondering what the difference is between a mutual fund and an exchange-traded fund (ETF). Both typically have different management setups, but each can help investors diversify their financial portfolios (the total of all your investments) at relatively low costs. However, one may be more costly to manage than the other.
Let’s explore each type of fund, how they differ, and how to decide which may be right for you.
What Are Mutual Funds?
You can think of a mutual fund as one big, diverse pot of investments, of which you own one or more shares. The fund invests in bonds, stocks, real estate, or other assets by pooling money from investors to purchase those securities. Fund managers usually actively manage mutual funds by studying and selecting securities they believe will outperform expectations or beat the market, and sometimes, they do.
Ultimately, the most profitable mutual funds can perform well in the short term, but they may not always be able to sustain that momentum long term. Plus, their associated management fees and taxes can cut into your earnings over time.
What are Exchange-Traded Funds?
ETFs collect money from investors and invest it in a large, diverse portfolio, just like mutual funds. But ETFs often have lower fees because they’re mostly passively managed (fund managers are less hands-on in selecting investments) and passive investing tends to outperform active investing. That means that ETFs can be just as lucrative as a mutual fund, if not more.
How Do These Funds Yield Earnings?
Both mutual funds and ETFs function similarly when it comes to earnings:
- Each fund raises enough money to invest in different securities, aiming to generate profitable earnings for investors.
- You buy shares in the fund’s portfolio, entitling you to a portion of its earnings.
- When the fund performs well, you receive the earnings you’re entitled to.
Now that you know how each fund works, it’s time to decide which may be best for you.
Deciding Between an ETF Vs. Mutual Fund
One fund isn’t necessarily better than the other, and you can invest in both at the same time. The choice depends on your investment goals and tax strategies. And knowing that mutual funds are generally more expensive than ETFs can help you narrow it down.
If you’re still stuck, you can consider the following:
Mutual funds may be the best bet if:
- You want a fund that has the potential to outperform the market at some point, yielding higher returns than an ETF in the short-term.
- You have faith in a particular mutual fund manager’s active-management style or track record.
- Your 401(k) retirement account invests in or allows automatic contributions to mutual funds, making it easier to regularly invest a set amount.
An ETF may be the better route if:
- You want to save on management fees, and you’re a tax optimizer interested in lightening your tax burdens.
- You’re an investor who prefers long-term strategies over the short-term profits a mutual fund could provide.
- Since retirement accounts don’t typically include ETFs, you want to make sure you’re diversifying your portfolio outside of retirement planning.1
No matter which option you choose, you can gain valuable experience for future investments.
Frequently Asked Questions
All investment involves risk, but some options may be less risky than others while still providing a return. A high-yield savings account (HYSA) is one relatively low-risk option that can help you earn interest on your deposits. Also, certain investment-grade bonds, which are like loans that you give out to investors or the government, can also provide a stable return with only a moderate level of risk.
There’s a popular idea in personal finance that retirees should be able to comfortably live off just 4% of their investments (which can include ETFs) during the first year of retirement.2 But there is no official 4% ETF rule per se. Wealth managers may just mention 4% as a starting point for retirement planning, and that advice may have gotten tangled up in your ETF research.
The Takeaway
Both mutual funds and ETFs can diversify your portfolio and earn profits, and you can invest in both simultaneously, but one may align with your overall investment strategy more closely. Generally, mutual funds perform better in the short term and are a bit more expensive to manage, while ETFs typically perform well in the long term and cost less. Either way, investing comes with risk, so researching all your options beforehand is a smart move.
Elliot M. Kass is a journalist who has covered global business and technology from New York, London, and San Francisco for more than 30 years.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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