ETFs and mutual funds both give investors diversified exposure to markets, but the differences in fees, taxes and trading structure can shape long‑term returns.
Opening a brokerage account often feels like a small step. Then the investment choices appear, and suddenly the decisions feel much bigger.
One of the first questions many new investors face is whether to buy an exchange‑traded fund or a mutual fund.
At first glance, the two look nearly identical. Both hold baskets of stocks or bonds.
Both allow investors to spread risk across many companies. And both are widely used in retirement portfolios.
But the similarities can hide some meaningful differences.
Some investors only realize those differences later. For example, someone might buy a mutual fund through a retirement account and eventually notice that an ETF tracking the same index charges lower fees.
Others start with ETFs because they are easy to trade but later learn that many workplace retirement plans still rely heavily on mutual funds.
The distinction matters because these two products hold a massive share of household wealth.
According to data from the Investment Company Institute, U.S. mutual funds held roughly $28 trillion in assets at the end of 2024, while ETFs surpassed $10 trillion.
The figures reflect a steady shift over the past decade as investors increasingly move toward exchange‑traded products.
Why ETFs Are Growing Faster Than Mutual Funds
Mutual funds have been part of American investing for almost a century.
They became especially dominant in the 1980s and 1990s when retirement plans such as 401(k)s expanded and offered mutual funds as their primary investment options.
Millions of workers built long‑term portfolios through those plans.
ETFs arrived much later. The first widely successful ETF launched in 1993 and tracked the S&P 500.
Over time the structure expanded far beyond large U.S. stocks. Investors can now find ETFs covering international markets, bonds, commodities and highly specialized themes.
Much of ETF growth comes down to cost.
As trading commissions dropped and index investing became more common, many investors started choosing ETFs for simple, low‑cost market exposure.
Morningstar reported in 2025 that ETFs have been pulling in hundreds of billions of dollars in new money each year, while many actively managed mutual funds have seen money flow out instead.
Fees are another major factor.
Morningstar’s 2024 U.S. Fund Fee Study, released in 2025, found that the asset‑weighted average expense ratio for U.S. funds fell to about 0.34%, continuing a long decline in investment costs.
ETFs generally remain cheaper than many traditional mutual funds.
ETF vs Mutual Fund Fees, Taxes And Trading Differences
Although ETFs and mutual funds can serve the same purpose, owning diversified investments, their structures create several practical differences for investors.
1. Trading Flexibility
ETFs trade on exchanges during the day, the same way stocks do. If the market is open, investors can buy or sell shares and see the price update in real time.
Mutual funds follow a different process. Orders are placed during the day, but they are all processed after the market closes using the fund’s net asset value.
For many long‑term investors the timing difference isn’t a big deal. But people who want to move money quickly or adjust their portfolio during the trading day often choose ETFs.
2. Fees And Cost Structure
Costs are one of the clearest distinctions between the two structures.
Many ETFs track market indexes passively. Because the portfolio simply follows an index instead of relying on active stock selection, operating costs tend to stay lower.
Mutual funds can also track indexes, but historically many have been actively managed. In those funds, portfolio managers attempt to beat the market by selecting specific investments.
That approach usually results in higher fees.
John Bogle, founder of The Vanguard Group and one of the most influential advocates of low‑cost investing, often emphasized how strongly fees affect long‑term returns.
“In investing, you get what you don’t pay for,” Bogle wrote in “The Little Book of Common Sense Investing,” arguing that lower costs allow investors to keep more of their market gains.
3. Tax Efficiency
Taxes are another difference that often surprises new investors.
ETF structures typically allow funds to limit capital gains distributions because of how shares are created and redeemed between institutional traders and the fund itself.
Mutual funds, especially actively managed ones, may generate capital gains when portfolio managers sell securities within the fund.
Those gains can be passed on to investors even if they did not sell their own shares.
This difference matters most in taxable brokerage accounts. In retirement accounts such as IRAs or 401(k)s, taxes are deferred, which reduces the advantage.
4. Accessibility In Retirement Plans
Even though ETFs have grown quickly, mutual funds still dominate many workplace retirement plans.
Most 401(k) plans offer mutual funds as the main investment choices. Target-date funds, which shift the mix of investments as people get closer to retirement, are usually built as mutual funds.
Some plans have started adding ETFs, but it depends on the provider and the plan.
How The ETF Boom Is Changing Investing
ETFs have grown as investing has become simpler and cheaper. Lower trading costs and the spread of index investing have pushed many people toward basic, diversified funds.
Even so, mutual funds still hold a large share of retirement savings, especially through target‑date funds that gradually shift risk as investors get closer to retirement.
Advisors often note that the fund structure matters less than the strategy. An ETF and a mutual fund tracking the same index should provide similar market exposure.
What does matter is cost. Even small fee differences can compound over time, and Morningstar research has shown that lower‑cost funds tend to outperform higher‑cost competitors over long periods because expenses directly reduce investor returns.
FAQ: ETF vs Mutual Funds, Which Is Better?
Are ETFs better than mutual funds?
Not always. ETFs usually have lower fees, better tax efficiency and can be traded during the day. Mutual funds are still common in retirement plans and often include actively managed strategies. The right choice depends on an investor’s goals and where the money is invested.
Why are ETFs growing faster than mutual funds?
Lower costs are a big reason. Many ETFs track indexes and charge smaller fees than actively managed funds. Investors also like the ability to buy and sell them throughout the trading day.
Do ETFs perform better than mutual funds?
Not by default. Performance depends on the investments inside the fund. An ETF and a mutual fund tracking the same index should produce nearly the same returns before fees.
Which option works best for retirement investing?
Mutual funds still dominate most workplace retirement plans, especially through target‑date funds. In regular brokerage accounts, many investors choose ETFs for their lower costs and tax efficiency.
In practice, both ETFs and mutual funds can work well in a diversified portfolio. Low fees, diversification and long‑term discipline matter more than the structure.