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ETFs vs. Mutual Funds

What Makes ETFs Different from Mutual Funds: A Beginner’s Guide

If you’ve ever wondered, “What’s the difference between an ETF and a mutual fund, and why should I care?”—you’re not alone. Both ETFs (Exchange-Traded Funds) and mutual funds are popular ways to diversify your investments, but they come with some key differences. Understanding these differences can help you make smarter decisions about where to put your money.

The Basics: What Are ETFs and Mutual Funds?

Think of ETFs and mutual funds like a basket of investments. Instead of buying individual stocks or bonds, you get a piece of a big basket that holds lots of them. This makes it easier to diversify your investments because your money is spread across many different assets, reducing risk. But the way you buy and sell that basket, and how it’s managed, is what sets ETFs and mutual funds apart.

An ETF (Exchange-Traded Fund) trades on a stock exchange, just like a regular stock. It’s like being able to buy a piece of that investment basket anytime during the day, whether the market is up, down, or sideways. If you’ve ever traded stocks using an app like Public.com or Charles Schwab, you can trade ETFs the same way.

On the other hand, a mutual fund is different because it only trades at the end of the trading day. You place your order to buy or sell shares during the day, but the transaction only gets completed after the market closes, based on the price of all the investments in the mutual fund at that time. This means you don’t know the exact price you’re getting until the day’s trading ends.

How They’re Managed: Active vs. Passive

One of the biggest differences between ETFs and mutual funds is how they’re managed. Let’s talk about passive and active management, and don’t worry—I promise to keep it simple.

Most ETFs are passively managed, which means they aim to track a specific index like the S&P 500. Think of it like putting your investments on autopilot. You’re not trying to beat the market; you’re just along for the ride. For example, if you invest in the SPDR S&P 500 ETF (SPY), you’re essentially buying a little slice of all 500 companies in the S&P 500. You’re betting that the overall market will go up over time, and you get to enjoy the convenience of buying or selling whenever the market is open.

Mutual funds, especially those that are actively managed, are a different story. These funds have managers who try to beat the market by picking stocks they believe will outperform. You’re paying for that expertise, hoping that they’ll make smart choices and generate better returns. For instance, Fidelity’s Contrafund is a well-known, actively managed mutual fund that aims to outdo the S&P 500 by carefully selecting stocks. But here’s the kicker: not every manager can consistently beat the market, and even if they can, their higher fees can cut into your returns.

Fees and Costs: What’s the Damage?

Speaking of costs, let’s get into what you’re really paying for. One of the best things about ETFs is that they usually come with lower expense ratios—a fancy way of saying how much you’re paying to own the fund. Because ETFs are typically passive, they don’t require a lot of buying and selling, which keeps costs down. For example, Vanguard’s Total Stock Market ETF (VTI) has an expense ratio of just 0.03%. That means for every $1,000 you invest, you’re only paying 30 cents per year in fees.

Mutual funds, especially actively managed ones, tend to charge higher fees because you’re paying for that manager’s expertise. Some mutual funds have expense ratios of 1% or more. That might not sound like a big difference, but over time, it can add up. Imagine paying $10 for every $1,000 you invest each year, compared to just 30 cents. Over 20 or 30 years, that difference really impacts how much money you end up with.

Tax Efficiency: The Hidden Costs

Another thing to keep in mind is tax efficiency. ETFs tend to be more tax-efficient than mutual funds. Why? Because of the way they’re structured, ETFs can buy and sell stocks without creating a taxable event for their investors. This means you could end up paying less in capital gains taxes.

Mutual funds, on the other hand, might hit you with capital gains taxes even if you didn’t sell your shares. If the mutual fund manager sells a stock that made a big profit, you could owe taxes on those gains—even if you just sat there holding your investment. It’s like having to pay taxes on profits you never directly received, which can be frustrating for long-term investors.

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What You Need To Know

Goldman Sachs beat Wall Street’s expectations for its third-quarter earnings, reporting $8.40 per share, well above the $6.89 estimate, and revenue of $12.7 billion, topping the $11.8 billion forecast. Profits surged 45% year-over-year, reaching $2.99 billion, while revenue rose 7%. The bank saw strong performance in stock trading, with equities revenue jumping 18% to $3.5 billion and investment banking revenue up 20% to $1.87 billion. CEO David Solomon highlighted an “improving operating environment” as the Fed’s rate cuts create opportunities for deal-making and boost Goldman’s asset and wealth management business. Despite the strong results, Goldman shares remained flat after a brief 2% rise.

Walgreens plans to shut down 1,200 stores over the next three years, aiming to shrink its footprint as sales slow and consumer habits change. About 500 closures will happen in the next year, with the company estimating that a quarter of its 8,700 U.S. locations are losing money. Announced during its better-than-expected earnings report, CEO Tim Wentworth called the downsizing part of a "turnaround" that will take time but ultimately benefit both finances and consumers. Like Walgreens, competitors CVS and Rite Aid are navigating tough market conditions, partly due to changes in the prescription drug market and tighter margins from pharmacy benefit managers (PBMs).

Netflix shares jumped 11% on Friday after the streaming giant reported better-than-expected third-quarter results. Earnings per share came in at $5.40, beating the $5.12 estimate, while revenue reached $9.83 billion, slightly above expectations. A key highlight was the 35% growth in Netflix’s ad-supported tier, which now makes up over 50% of new sign-ups in markets where it’s available. Though ads won’t be a primary growth driver until 2026, the trend is promising. Netflix also offered an optimistic outlook for the December quarter and expects steady growth through 2025.

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Automate Your Investing

One of the easiest ways to stay on track with your investing goals is to automate it. By setting up automatic contributions to your investment accounts each month, you ensure that you’re consistently putting money to work without having to think about it. It’s like paying yourself first—before you have a chance to spend it elsewhere. For example, if you automatically invest $200 a month into an index fund, you could end up with over $60,000 in 15 years with a 7% average return. Automating helps take emotions out of the process and keeps you building wealth, rain or shine.

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