Management
Exchange-traded funds can be passively or actively managed by the fund managers and are linked to an index’s performance. Mutual funds are usually actively managed. Both come in active and indexed varieties.
Trading
Transactions or trades on mutual funds are made once a day, and investors receive the same price on that same day. On the other hand, ETFs are traded like stocks where they are bought and sold on the stock exchange. As such, ETFs fluctuate throughout the day.
Minimum investment
Since ETFs are traded like stocks, there is no minimum investment required. You can even purchase an ETF for the price of one share, which is known as the market price. On the other hand, mutual funds require initial investments at a flat dollar amount, and shares can be purchased in fractional shares.
Costs
The most surprising difference between the two is the cost. ETFs come with implicit and explicit costs. Mutual funds can be purchased without any trading commissions. However, they might come with operational expenses like sales loads or early redemption fees.
Tax efficiency
ETFs generate fewer capital gains since they have a lower turnover and use the in-kind redemption process for the cost basis of their holdings. But in mutual funds, you are still eligible to receive capital gains from the generated sale of assets within the fund. The same is true even if you experience loss in your investment.
