Mutual Funds Versus ETFs – Which Is Better?

For many decades now, retail investors looking to get into the stock markets, without picking individual stocks, had only one way to do so. Mutual Funds. However, over the past half decade or so, another star has risen in the investment world.

Learn how Electronic Traded Funds (ETFs) are changing the retail investing landscape.


Anyone who is invested in a pension plan or other retirement savings vehicle – such as a 401K – is likely to have Mutual Funds as part of their investments. These are dynamic investment vehicles that give investors, with small amounts to invest, a broad exposure to the bond and equities market.

  • They hold a large number of individual stocks/bonds – sometimes hundreds or even thousands
  • They leverage economies of scale, which makes buying and selling individual stocks more cost effective
  • They allow individual investors with little capital to buy stocks and bonds in companies with high unit prices
  • They enable you to buy fractions of stocks frequently – e.g. half a stock of Apple Inc each month – and build a sizable position in that company over time

Depending on the focus of the Mutual Fund, these baskets are built out of niche stocks in a specific area. For instance, a Global Small Cap Mutual fund will only contain stocks from global small cap companies; a Corporate Bond Mutual Fund will only hold company bonds. Investors can therefore hold several “baskets”, each with different focus (Small Caps, Large Caps, Growth stocks, Dividend payers, Value stocks etc.) to build a diversified portfolio.


When ETFs first entered the scene several years ago, they were looked upon with skepticism. Mutual Fund managers widely criticized them, even going so far as to say they were a passing trend that would not survive. But time has proven that ETF’s are here to say, so much so that leading Mutual Fund companies have now started offering ETFs as well!

So what are ETFs? Well, for the most part, they embody all four of the main characteristics of Mutual Funds that we highlighted above. However, they have two very important characteristics that make them more attractive to retail investors:

  • Firstly, unlike Mutual Funds, you can buy and sell an ETF just as you would a common stock. The buy/sell price of a Mutual Fund is determined at the end of a trading day, while that of an ETF is posted like a regular stock, making it more convenient for DIY investors


  • Most importantly though, is the cost factor. ETFs have made it extremely cost effective for small investors to buy, own and sell them – making them a much cheaper alternate to Mutual Funds. In many instances, an ETF will cost several percentage points less in Management Expense Ratio (MERs)/fees than a comparable Mutual Fund
Source: Investment Company Institute


These two qualities have made ETFs extremely popular as an investment vehicle. According to research from the Investment Company Institute, the latest statistics show that net issuance of ETFs have ballooned to $1.12 billion in the week of April 20th 2016, compared to $416 million of capital flows into Mutual Funds during that same period.



While ETFs are definitely here to stay, it does not necessarily mean they will displace Mutual Funds all together – at least not in the near term. A truly balanced portfolio could be built from using diverse investment vehicles, including both Mutual Funds and ETFs. The trick however is:

  • Analyze your investment goals and objectives
  • Search for an ETF (or three!) that will help you meet those objectives
  • Look for equivalent Mutual Funds that have the same/significant similar profile
  • Compare the costs, performance and benefits of each product

There is therefore no need to put all your eggs in a single basket. Using this approach, investors can’t go wrong with selecting the best vehicle on a cost-performance basis.








Die besten News per E-Mail
Melden auch Sie sich für mehr Infos an!