ETF Versus Mutual Fund Fees - Fidelity (2024)

With all things being equal—the structural differences between the 2 products give ETFs a cost advantage over mutual funds.


For the most part, ETFs are less costly than mutual funds. There are exceptions—and investors should always examine the relative costs of ETFs and mutual funds. However—all else being equal—the structural differences between the 2 products do give ETFs a cost advantage over mutual funds.

Mutual funds charge a combination of transparent and not-so-transparent costs that add up. It's simply the way they are structured. Most, but not all, of these costs are necessary to the process. Most could be a little cheaper; some could be a lot cheaper. But it's nearly impossible to get rid of them altogether. ETFs have transparent and hidden fees as well—there are simply fewer of them, and they cost less.

Mutual funds charge their shareholders for everything that goes on inside the fund, such as transaction fees, distribution charges, and transfer-agent costs. In addition, they pass along their capital gains tax bill on an annual basis. These costs decrease the shareholder's after-tax return on their investment. On top of that, many funds charge a sales load for allowing you the pleasure of investing with them. On the other hand, ETFs offer more trading flexibility, generally provide more transparency, and are more tax efficient than mutual funds.


Most actively managed funds are sold with a load. Loads for mutual funds generally range from 1% to 2%. Most of these funds are sold through brokers. The load pays the broker for their efforts and gives an incentive to suggest a particular fund for your portfolio.

Financial advisors get paid one of 2 ways for their professional expertise: by commission or by an annual percentage of your entire portfolio, usually between 0.5% and 2%, in the same way you pay an annual percentage of your fund assets to the fund manager. If you don't pay an annual fee, the load is the commission the financial advisor receives.

ETFs don't often have large fees that are associated with some mutual funds. But because ETFs are traded like stocks, you may pay a commission to buy and sell them, although there are commission-free ETFs in the market.

To be fair, mutual funds do offer a low cost alternative: the no-load fund. True to its name, the no-load fund has no load. Every single dollar of the $10,000 that you want to invest goes into the index fund; none of it is whisked away by a middleman. The reason for this is that you do all the work that the stockbroker does for the average investor. You do the research and you fill out the forms to purchase the fund. In essence you are paying yourself the broker's commission, which you invest.

Most index funds and a small group of actively managed funds don't charge a load. No-load index funds are the most cost efficient mutual funds to buy because they have smaller operating costs.

Expense ratio

In a mutual fund's prospectus, after the load disclosure is a section called "Annual Fund Operating Expenses." This is better known as the expense ratio. It's the percentage of assets paid to run the fund. Well, most of them. Many costs are included in the expense ratio, but typically only 3 are broken out: the management fee, the 12b-1 distribution fee, and other expenses.

In addition to paying the portfolio manager's salary, the management fee covers the cost of the investment manager's staff, research, technical equipment, computers, and travel expenses to send analysts to meet corporate management. While fees vary, the average equity mutual fund management fee is about 1.10%.

Mutual funds and ETFs can be either actively or passively managed. Active management can be a good thing if the fund manager is talented and is able to outperform the market.

12b-1 fees

Some mutual funds—including many no-load and index funds—charge investors a special, annual marketing fee called a 12b-1 fee, named after a section of the 1940 Investment Company Act. The 12b-1 fee is broken out in the prospectus as part of the expense ratio. It can run as high as 0.25% in a front-end load fund and as high as 1% in a back-end load fund. Many investor-right advocates consider these expenses to be a disguised broker's commission.

One thing can be said for the front-end and back-end loads: They're upfront about what the fee will be, and it's a one-time charge. Essentially, you go to a broker, they help you to buy a mutual fund, and you pay for the service.

This is not the case with the 12b-1 fee. While it is intended to pay for promotion and advertising, only 2% of the fees are used for that. The rest is paid to brokers for ongoing account servicing. Essentially, it's paid to the broker who sold you the fund on an annual basis, for as long as you own the fund, even if you never see the broker again.

ETF costs

In contrast to mutual funds, ETFs do not charge a load. ETFs are traded directly on an exchange and may be subject to brokerage commissions, which can vary depending on the firm. While the absence of a load fee is advantageous, investors should beware of brokerage fees, which can become a significant issue if an investor deposits small amounts of capital on a regular basis into an ETF. In many cases, an investor interested in pursuing a "dollar cost averaging strategy" or a similar strategy that involves frequent transactions, may want to explore closely alternatives offered by mutual fund companies to minimize overall costs.

ETFs expense ratios generally are lower than mutual funds, particularly when compared to actively managed mutual funds that invest a good deal in research to find the best investments. And ETFs do not have 12b-1 fees. That said, according to Morningstar, the average index ETF expense ratio in 2023 was 0.48% and 0.73% for active ETFs, compared with the average expense ratio of 0.81% for index mutual funds and 1.02% for actively managed mutual funds.

ETF Versus Mutual Fund Fees - Fidelity (2024)


Do mutual funds have higher fees than ETFs? ›

ETFs expense ratios generally are lower than mutual funds, particularly when compared to actively managed mutual funds that invest a good deal in research to find the best investments.

Does Fidelity charge fees for ETFs? ›

Free commission offer applies to online purchases of Fidelity ETFs in a Fidelity brokerage account with a minimum opening balance of $2,500. The sale of ETFs is subject to an activity assessment fee (of between $0.01 to $0.03 per $1000 of principal).

Is it better to buy a mutual fund or ETF? ›

Lower costs: Although it's not guaranteed, ETFs often have lower total expense ratios than competing mutual funds, for a simple reason: when you buy shares of a mutual fund directly from the mutual fund company, that company must handle a great deal of paperwork—recording who you are and where you live—and sending you ...

Are ETFs taxed differently than mutual funds? ›

ETFs are generally considered more tax-efficient than mutual funds, owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.

What are three disadvantages to owning an ETF over a mutual fund? ›

Disadvantages of ETFs
  • Trading fees. Although ETFs are generally cheaper than other lower-risk investment options (such as mutual funds) they are not free. ...
  • Operating expenses. ...
  • Low trading volume. ...
  • Tracking errors. ...
  • The possibility of less diversification. ...
  • Hidden risks. ...
  • Lack of liquidity. ...
  • Capital gains distributions.

Do you pay taxes on ETFs if you don't sell? ›

At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

Which ETFs are free on Fidelity? ›

Commission-Free ETFs on Fidelity
Symbol SymbolETF Name ETF NameAsset Class Asset Class
IJHiShares Core S&P Mid-Cap ETFEquity
IJRiShares Core S&P Small-Cap ETFEquity
IEMGiShares Core MSCI Emerging Markets ETFEquity
ITOTiShares Core S&P Total U.S. Stock Market ETFEquity
4 more rows

Does Fidelity charge more for Vanguard ETF? ›

Vanguard and Fidelity Fees

To trade stocks, ETFs, options and most mutual funds, clients of both firms will avoid commissions altogether. Options at Vanguard come with a $1 contract fee, while Fidelity charges an even lower $0.65 contract fee.

Is Fidelity impose a new $100 servicing fee on some ETFs? ›

Come June 3rd, and zero-cost trading will still reign — but as Emily Graffeo and I reported last week, that's when Fidelity Investments will impose a new $100 servicing charge on buy orders for ETFs issued by nine firms, according to a document seen by Bloomberg News.

What is Fidelity's best performing ETF? ›

The largest Fidelity ETF is the Fidelity MSCI Information Technology Index ETF FTEC with $9.58B in assets. In the last trailing year, the best-performing Fidelity ETF was FDIG at 58.51%. The most recent ETF launched in the Fidelity space was the Fidelity Yield Enhanced Equity ETF FYEE on 04/11/24.

Should I convert mutual fund to ETF? ›

If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.

Are active ETFs cheaper than mutual funds? ›

Compared to a mutual fund, an active ETF has several advantages, including cost, because all other things being equal, ETFs tend to be cheaper. Other advantages are real-time stock market trading and transparency (many of these instruments make their portfolio positions available on a daily basis).

Why do mutual funds cost more than ETFs? ›

Mutual funds are an older way of allowing a group of investors to own a share in a larger portfolio. Mutual funds tend to be actively managed, so they're trying to beat their benchmark, and may charge higher expenses than ETFs, including the possibility of sales commissions.

How long should you hold an ETF? ›

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

Do ETFs typically have lower fees than mutual funds? ›

The administrative costs of managing ETFs are commonly lower than those for mutual funds. ETFs keep their administrative and operational expenses down through market-based trading. Because ETFs are bought and sold on the open market, the sale of shares from one investor to another does not affect the fund.

Do mutual funds have high fees? ›

A reasonable expense ratio for an actively managed portfolio is about 0.5% to 0.75%, while an expense ratio greater than 1.5% is typically considered high these days. For passive funds, the average expense ratio is about 0.12%.

Why are active ETFs cheaper than mutual funds? ›

Lower Expenses

ETFs don't really need large shareholder servicing departments that mutual funds have. Another important factor that leads to lower costs is that ETFs do not pay trailer fees to investment advisors who recommend them to investors.

Do mutual funds generally have higher fees than index funds? ›

This is because mutual funds are actively managed, involving research and decision-making by fund managers, while index funds passively track a specific market index, requiring less active management. As a result, mutual funds often have higher fees, including management fees and transaction costs.

Why does ETF have lower fees? ›

For most investors, ETF trades take place with other investors, and not with the fund company itself. That means the fund company doesn't have to process your order; doesn't have to mail you the same documents; and doesn't have to go into the market to process your order. Less work = lower costs.

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