Generally, both ETFs and mutual funds are managed by fund managers and are diversified across many different securities. Many of these funds are designed to track the performance of a major market benchmark or index. Some, but not all, mutual funds are actively managed, meaning they are managed with the expectation of beating the performance of an index. Such mutual funds tend to be much more expensive than ETFs.
Taxes are important. Mutual funds distribute capital gains even if you haven’t sold any shares, potentially creating unintended tax consequences. In contrast, investors of ETFs decide when to sell their shares and take capital gain distributions, providing ETF investors with more control of when taxable events occur. This allows investors to minimize and control the timing of their tax liability. This control may make ETFs more ‘tax efficient’ than mutual funds.
Another difference is how the two trade. ETFs trade during market hours exactly like stocks do and every order can get a different execution price. A market order to buy gets executed seconds after you submit your order. Mutual funds on the other hand only trade once a day, after the market closes, and everyone gets the same execution price on that day regardless if it’s a buy or sell. So liquidity is a major differentiator between ETFs and Mutual Funds.
While mutual funds may be less tax efficient, we’ve included two in our Ellevest Impact Portfolios that are designed to offer competitive market returns and power positive social change: Pax-Ellevate Global Women’s Leadership Fund and the Access Capital Community Investment Fund. These strategies are not currently offered as ETFs.