ETFs vs. Mutual Funds: What Is the Difference?

By Adam Patti, Chief Executive Officer, VistaShares | Published November 13, 2026

ETFs and mutual funds both pool investors’ money into a professionally managed portfolio, but they are bought and sold differently. ETF shares trade on an exchange throughout the day at market prices, like stocks. Mutual fund shares are bought from and sold back to the fund once a day at net asset value. That difference shapes their trading, costs, transparency, minimum investments and how capital gains are handled.

What do ETFs and mutual funds have in common?

Both are investment companies, typically registered under the Investment Company Act of 1940. Both hold a portfolio of securities chosen by an adviser or set by an index, publish a prospectus and charge an annual expense ratio. Both can be passive or active, and both cover nearly every asset class. U.S. mutual funds held about $31.4 trillion in total net assets at the end of 2025, and U.S. ETFs held about $13.4 trillion across 4,495 funds, according to the Investment Company Institute.¹ ETF assets have continued to grow: ETFGI reported $16.24 trillion invested in U.S. ETFs at the end of September 2026.²

How does buying and selling differ?

Mutual funds: investors place orders with the fund, directly or through a broker, and every order received before the cutoff, usually the 4:00 p.m. Eastern market close, is filled at the net asset value calculated that day. SEC Rule 22c-1 requires that purchases and redemptions occur at the next net asset value computed after the order is received.³ Investors do not know their exact price when they place the order.

ETFs: investors buy and sell shares on an exchange through a brokerage account, at whatever price the market sets at that moment. Prices change throughout the trading day. Investors can use limit orders, stop orders and other order types available for stocks. Our article on how to buy an ETF covers the steps.

Behind the scenes, ETFs also have a primary market. Large financial institutions called authorized participants create and redeem ETF shares directly with the fund, usually in large blocks and often by exchanging baskets of securities. This process helps keep the ETF’s market price close to its net asset value.

How do costs compare?

Expense ratios: both charge an annual expense ratio, shown in the prospectus fee table. Index ETFs and index mutual funds can both be very low cost; actively managed funds of either type usually cost more.

Sales charges and share classes: many mutual funds offer several share classes, some with front-end or back-end sales loads or ongoing distribution fees. ETFs generally have a single share class and no sales loads.

Trading costs: ETF investors may pay a brokerage commission, though many brokers charge none, and they pay the bid-ask spread, the gap between buying and selling prices. ETF prices can also trade at a small premium or discount to net asset value. Our article on ETF bid-ask spreads, premiums and discounts explains these costs. Mutual fund investors avoid spreads but may face transaction fees on some platforms and short-term redemption fees at some funds.

How do minimum investments compare?

Many mutual funds set an initial minimum investment, often from several hundred to several thousand dollars, though some share classes and retirement plans waive it. An ETF can be bought one share at a time, and many brokerages now offer fractional shares, so the minimum can be very small.

How does transparency compare?

ETFs relying on SEC Rule 6c-11, adopted on September 26, 2019, must disclose their full portfolio holdings on their websites each business day.⁴ Mutual funds generally disclose holdings quarterly, with a lag, through regulatory filings and shareholder reports. Some actively managed ETFs use alternative structures that disclose less frequently, so it is worth checking each fund.

How are capital gains handled?

When a mutual fund needs cash to meet redemptions, it may sell securities. If those sales produce net gains, the fund generally distributes them to all remaining shareholders, who may owe tax in a taxable account even if they did not sell any shares.

ETFs usually meet large redemptions in kind, delivering a basket of securities to the authorized participant instead of selling for cash. Under Section 852(b)(6) of the Internal Revenue Code, a regulated investment company generally does not recognize gain when it distributes property to redeem shares at a shareholder’s demand.⁵ As a result, many ETFs, particularly index equity ETFs, distribute fewer capital gains than comparable mutual funds. This is not universal: some ETFs, including many bond, option-based and actively managed ETFs, do distribute capital gains, and ETF investors still owe tax on dividends, interest and their own gains when they sell. Tax outcomes depend on the fund and the investor’s circumstances.

Which features favor each?

ETFs: intraday trading, low or no minimums, daily holdings disclosure, generally a single share class and, for many index ETFs, fewer capital gain distributions.

Mutual funds: exact net asset value pricing with no bid-ask spread, easy automatic investment plans in exact dollar amounts, wide availability in workplace retirement plans and access to some strategies or share classes that are not offered as ETFs.

Is one better for passive or active investing?

Both structures support both approaches. Index ETFs and index mutual funds tracking the same index tend to perform similarly before costs. Active ETFs have grown quickly in recent years, and many managers now offer the same strategy in both forms. Our article on active versus passive ETFs compares the two approaches.

How do investors choose?

Where the money is held: a workplace plan may offer only mutual funds; a brokerage account offers both.

How the investor trades: those who want to place orders during the day or use limit orders may prefer ETFs. Those who invest fixed amounts on a schedule may find mutual funds simpler, though many brokers now support recurring ETF purchases.

Account type: capital gain distributions matter in taxable accounts and much less in tax-deferred accounts.

Total cost: compare expense ratios, loads, commissions and spreads.

For more on how ETFs work, see the ETF Basics Guide and our article on what an ETF is.

Frequently asked questions

Are ETFs cheaper than mutual funds?

Often, but not always. Index ETFs and index mutual funds can both have very low expense ratios. Mutual funds may add sales loads or distribution fees in some share classes, while ETF investors pay bid-ask spreads and sometimes commissions. Comparing total costs for the specific funds gives the clearest answer.

Why can I trade an ETF during the day but not a mutual fund?

ETF shares are listed on an exchange and trade between investors at market prices throughout the day. Mutual fund shares are bought from and sold back to the fund itself, and SEC rules require those transactions to occur at the next net asset value calculated, usually once a day after the market closes.

Do ETFs pay capital gains distributions?

Some do. Many index equity ETFs distribute few or no capital gains because they can meet redemptions in kind. Bond ETFs, option-based ETFs and actively managed ETFs are more likely to distribute gains in some years. Each fund reports its distributions, and the final tax character appears on Form 1099-DIV.

Is there a minimum investment for an ETF?

The practical minimum is the price of one share, or less where a brokerage offers fractional shares. Mutual funds often set initial minimums, though some share classes and retirement plans waive them.

Can the same strategy be offered as both an ETF and a mutual fund?

Yes. Many managers offer the same index or active strategy in both structures. The underlying holdings can be similar, while trading, costs and capital gain handling differ.

Which is better for a retirement account?

In tax-deferred accounts, the difference in capital gain distributions matters less, so the choice often comes down to costs, available options and how the investor prefers to buy. Workplace plans frequently offer mutual funds, while individual retirement accounts at brokerages usually offer both.

Cite this page: Adam Patti, "ETFs vs. Mutual Funds: What Is the Difference?," VistaShares, updated November 13, 2026, https://www.vistashares.com/etfs-vs-mutual-funds/. Plain-text version.

This material is provided for educational purposes only. It is not investment, legal or tax advice, and it is not a recommendation or an offer to buy or sell any security. Information is drawn from sources believed to be reliable as of the date of publication, is not guaranteed as to accuracy or completeness, and may change without notice. Figures attributed to third parties are their estimates. Projections and forecasts are not guarantees of future results. Investors should consult their own financial, legal and tax professionals before making investment decisions. Investments involve risk, including possible loss of principal. Strategies that use options involve additional risks, including limited participation in market gains, the risk that options do not perform as intended, and changes in distributions. Tax treatment depends on individual circumstances and on current law, which may change.