ETFs vs. Mutual Funds: What to Know
Compare Tax Advantages, Trading Flexibility and Fees
Although exchange-traded funds (ETFs) and mutual funds share many similarities, an ETF is a different investment vehicle with distinguishing features that offer investors more ways to potentially save money over time. Let’s take a look at ETFs' tax advantages, trading flexibility and generally lower fees compared to mutual funds.
Why ETFs Are More Tax Efficient
Building a secure financial future involves keeping more of what you earn. And a critical success factor is effectively managing your tax burden.
An ETF is bought and sold from one investor to another on an exchange as an in-kind trade, which means ownership of the ETF changes hands without directly selling the underlying stocks or other securities. This type of transaction, along with the mechanics of how ETF shares are issued and redeemed, typically results in fewer capital gains.
In contrast, when you liquidate mutual fund shares, the fund manager may have to sell underlying securities. This may result in realized capital gains that are taxable for all shareholders in the fund—not just the ones selling their shares.
Why ETFs Give You More Trading Flexibility
The primary difference between mutual funds and ETFs is how they are bought and sold.
The price of a mutual fund’s shares is calculated once per day, after the market closes. Everyone who places a trade prior to the market close receives that price, whether buying or selling.
ETFs, like individual stocks, are priced continually throughout the trading day on an exchange. You get the price, whether buying or selling, at the time you place your order.
ETFs that cover major asset classes and markets can usually be bought and sold relatively quickly at current prices.
However, just like purchasing stocks, you may pay a commission and/or brokerage fee for ETF trades.
Why ETFs Have Lower Fees Than Mutual Funds
Even with commissions and other brokerage costs, ETFs generally have lower expense ratios than mutual funds because there is less administrative and management work associated with them.
For example, purchases and sales of mutual funds take place through the mutual fund company. With ETFs, the fund company is not involved in purchases and sales since transactions occur among investors on the exchange. This difference helps reduce ETFs' operating costs.
How ETFs Compare to Mutual Funds and Stocks
Like a mutual fund, an ETF is a pooled investment vehicle, meaning it combines your money with other people’s money to invest in a portfolio of stocks, bonds and/or other securities. Unlike mutual funds, ETF shares trade like stocks on stock exchanges—bought or sold throughout the trading day at fluctuating prices.
Trade on Exchange
Priced Throughout Trading Day
*Most retail broker-dealers have reduced ETF commissions to zero. Please consult your broker-dealer on specific fees.
ETFs Combine Characteristics of Mutual Funds and Stocks
How to Choose an ETF That’s Right for You
Selecting the right investments for your portfolio depends on your goals, time horizon and personal preferences. That’s why we designed our ETFs to meet a variety of investors’ needs.
Our lineup includes a full range of ETFs that help you seek better outcomes across market cycles. And you can combine them with mutual funds and individual stocks and bonds to customize your portfolio.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
Exchange Traded Funds (ETFs) are bought and sold through exchange trading at market price (not NAV), and are not individually redeemed from the fund. Shares may trade at a premium or discount to their NAV in the secondary market. Brokerage commissions will reduce returns.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.