ETFs vs. mutual funds: A family‑friendly breakdown
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In the world of investing, you’ll commonly hear about two popular ways you can invest: ETFs and mutual funds. Both can be part of a family’s long-term financial plan. We’ll explore the similarities and differences to help you understand how you can utilize them for yours.
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What are ETFs and mutual funds?
Mutual funds and ETFs are two types of investments you can make. Here, we break down the differences.
Mutual funds
Think of a mutual fund like a big basket of different investments, such as stocks or bonds, that many people put their money into. Everyone owns a small piece of the whole basket — their share. A professional money manager decides what goes into the basket, aiming to help it grow over time. The value of your share changes daily based on the performance of all investments in the basket.
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ETFs
An exchange-traded fund (ETF) can also be viewed as a basket of investments, similar to a mutual fund, but it trades more like a stock. That means you can buy or sell it anytime the market is open. Most ETFs are designed to track things like the S&P 500, which is a list of major U.S. companies, so they’re usually not managed by a professional money manager. You can often invest in ETFs with just a few dollars, and they tend to have lower fees.
Comparing ETFs and mutual funds
While the two investment vehicles sound very similar, there are some differences that may determine which is more suitable for your personal investment strategy. Here are a few highlights:
| Mutual funds | ETFs |
How it’s bought/sold | Bought and sold once per day, as the stock market closes, directly through the fund company | Bought and sold like a stock, directly on the stock market, anytime the market is open |
Price updates | Price is updated at the end of each stock market day | Price changes throughout the day |
Management style | Actively managed, meaning a group of professional money managers makes the investment decisions | Passive, meaning instead of money managers choosing the investments, it aims to have the same investments as an index, such as the S&P 500 |
Minimum investment | Varies, depending on the fund and fund company, but often $500–$3,000 | Can be as low as the price of one share, or a fractional share |
Fees | Varies, but averages between 0.5% and 1% | Varies, but averages between 0.03% and 0.3% |
Taxes | May generate taxable gains due to trades the money managers make inside the fund, even if you don’t sell | Typically more tax-efficient due to “in-kind” trading, which does not generate taxable gains for shareholders |
Automatic investing | Typically easy to set up recurring investments directly with the fund company | Availability depends on the brokerage you’re using |
Liquidity | Can only trade once per day, which is processed after the market closes | Can buy or sell any time during market hours |
Which one is right for you?
Every mutual fund and ETF is different, as are every investor’s goals and objectives. Here are a few things to consider:
Investing in a brokerage account: ETFs are generally more tax-efficient. Some mutual funds actively buy and sell stocks, which can cause the fund and all of its investors to have taxable capital gains, even if you don’t sell your shares.
For lower costs: ETFs typically have lower fees than mutual funds.
For flexibility: Mutual funds can only be traded once per day when the stock market closes, while ETFs can be bought or sold anytime the market is open.
For automatic investing: It’s easier to set up automated investing with mutual funds since most fund companies allow you to set up recurring investments. For ETFs, it depends on which brokerage you use.
Keep in mind that both mutual funds and ETFs are essentially baskets of investments, each designed to achieve a specific investment goal. For example, some may invest only in specific types of companies, such as technology or healthcare companies, while others may be designed to be more aggressive or more conservative. So, it’s not just about choosing an ETF or a mutual fund, it’s also about choosing what’s inside them.
Learn more about your risk tolerance to help you decide which types of funds are best for you.
How Greenlight can help you invest smarter
All investing portfolios created with Greenlight are standard brokerage accounts held in the primary parent’s name.
Kids and teens can use the app to research, pick stocks or ETFs they’d like to invest in, and propose these investments for you, the parent, to approve. To invest, you will need to have Greenlight’s Max or Infinity plan.
In addition to providing a way for kids and families to invest together, Greenlight also helps build financial literacy and investing knowledge. Kids can learn through the educational content directly on the Greenlight app, explore our Learning Center, and play the financial literacy game*Level Up™.
To learn more, read our parent’s complete guide to investing for kids.
FAQs
Q: Can I own both ETFs and mutual funds?
Yes, many people use both, depending on their investment goals.
Q: Are ETFs safer than mutual funds?
Neither one is necessarily safer than the other. It’s more about what’s inside the fund (stocks, bonds, etc.) than the type of fund itself that determines the amount of risk involved.
Q: Why do mutual funds only trade once a day?
The price of mutual funds, also known as their net asset value (NAV), is calculated daily after the market closes. All trades are processed simultaneously, and NAV is calculated at the same time. As a result, all investors buy and sell at the same price as one another each day.
Q: How do I know which one to pick?
Use a tool like Greenlight to compare investments to help you decide which ones best fit your family’s goals.
Want to raise savvy investors? With Greenlight, kids get real-world experience under your guidance. Try Greenlight, one month, risk-free.†
*Requires the downloading of the Greenlight App and acceptance of Greenlight Level Up(™) Program Terms. Does not require subscription to Greenlight prepaid debit card plan.
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