Should You Use a Mutual Fund or an ETF?

I work with many clients whose are concerned with  choosing the right investments to achieve their retirement goals. I am often asked if they should choose a mutual fund or an ETF. These are similar in a number of ways. Tthey are both professionally managed and can provide diversification because they choose a large number of stocks within the asset class.  In addition, these are both commission free at Vanguard.  

An ETF provides a lower investment minimum, since you only have to purchase one share of the ETF.  Mutual funds may have minimums, and at Vanguard, most mutual funds have a minimum of $3,000.  If you want more control over the price of your trades, an ETF may be more suitable because they provide real time pricing, while the price of the mutual fund is calculated at the end of the trading day, so everyone trading is getting the same price. For my clients who want to schedule repeating transactions, a mutual fund is a better choice since you cannot make automatic deposits or withdrawals in an ETF fund.  So for clients in retirement that are taking the same monthly distribution out of their retirement accounts, it makes sense to have the assets in a mutual fund as opposed to an ETF.

Because ETF's are not taxed until they are sold, they may be more tax efficient. Mutual funds tend to be actively managed, and assets are bought and sold more frequently, which can result in capital gains being passed along to all of the investors. This does not matter if these assets are held in retirement accounts, since these grow on a tax free basis.

It is important to compare expense ratios and fund performance when choosing any investment, and a qualified financial advisor can help you to make the best selections.

About the Author

Patti Hughes is a Chicago Fee-Only Financial Planner.  Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions.  She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.