ETFs or Mutual Funds - Fidelity (2024)

Neither mutual funds nor ETFs are perfect. Both can offer comprehensive exposure at minimal costs, and can be good tools for investors.

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ETFs or Mutual Funds - Fidelity (1)

Exchange-traded funds (ETFs) and mutual funds are simply structures or vehicles that facilitate access to underlying investments. Enthusiasts refer to ETFs as modernized mutual funds—even calling them mutual funds 2.0. Meanwhile, detractors cite the shortfalls of ETFs and tout mutual funds as king. Cutting through the confusion is really just a matter of understanding the differences, and understanding where each structure makes the most sense.

Let's review the fundamental differences between the 2 structures.

The basics

On one level, both mutual funds and ETFs do the same thing.

Let's imagine, for instance, 2 products that are designed to track the S&P 500: an ETF and a mutual fund. If you look under the hood, both products will hold all (or most) of the 500 stocks in the index, in the exact proportion in which they exist in the index. At this point, the 2 product structures are identical.

The difference of course is that ETFs are "exchange traded." That means you can buy and sell them intraday, like any other stock. By contrast, you can only buy or sell index funds only once per day, after the close of trading. You do this by contacting the mutual fund company directly and telling them you want to acquire or redeem shares.

What does all that mean for investors? Let's take a closer look at ETFs.

ETFs or Mutual Funds - Fidelity (2)

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The positives of ETFs

  • Intraday liquidity: Those fancy words mean you can buy and sell ETFs at any time during the trading day. If the market is falling apart, you can get out at 10 a.m. In a mutual fund, you would have to wait until after the close of trading … which could be a costly delay.
  • 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 documents. When you buy shares of an ETF, you do so through your brokerage account, and all the recordkeeping is done (and paid for) by your brokerage firm. Less paperwork equals lower costs. Most of the time.
  • Transparency: ETF holdings are generally disclosed on a regular and frequent basis, so investors know what they are investing in and where their money is parked. Mutual funds, by contrast, are required to disclose their holdings only quarterly, with a 30-day lag.
  • Tax efficiency: ETFs are almost always more tax efficient than mutual funds because of how they interact. For more details, see ETFs vs. mutual funds: Tax efficiency.
  • Greater flexibility: Because ETFs are traded like stocks, you can do things with them you can't do with mutual funds, including writing options against them, shorting them, and buying them on margin.

The cons of ETFs

  • Commissions: Over the last few years the majority of trading platforms offer commission-free ETF trading programs, including Fidelity, but always check before you trade.
  • Spreads: In addition to commissions, investors also pay the "spread" when buying or selling ETFs. The spread is the difference between the price you pay to acquire a security and the price at which you can sell it. The larger the spread—and for some ETFs, the spread can be quite large—the larger the cost. There is no way to get around this.
  • Premiums and discounts: When you buy or sell a mutual fund at the end of the day, you always transact exactly at its stated "net asset value" (NAV), so you always get a "fair" price. While mechanisms exist that keep ETF share prices in line with their fair value, those mechanisms are not perfect. At any given moment, an ETF might trade at a premium or at a discount to its NAV. If you buy at a premium and sell at a discount, ouch … you've lost out.
  • General illiquidity: While exchange trading sounds great, not all ETFs are as tradable as you might think. Some trade rarely, or only at wide spreads. These become the financial equivalent of the Hotel California: You can never leave.

Conclusion

Neither mutual funds nor ETFs are perfect. Both can offer comprehensive exposure at minimal costs, and can be good tools for investors.

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds. If taxes are your priority, reserve the ultra-tax-efficient ETFs for taxable accounts and use mutual funds in tax-deferred accounts.

It's important to note that this isn't an either/or decision. Mutual funds and ETFs can live perfectly happily side by side in a portfolio .

ETFs or Mutual Funds - Fidelity (2024)

FAQs

Is it better to invest in ETFs or mutual funds? ›

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

Are Fidelity ETFs worth it? ›

ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.

Should I have more stocks or ETFs? ›

Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.

Is FXAIX an ETF or mutual fund? ›

FXAIX is a mutual fund. Because index-tracking funds will follow the performance of the index, one of, if not the, biggest determinant of long-term returns is how much it charges in fees.

Why would someone choose an ETF over a mutual fund? ›

ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.

Why would you choose ETFs over mutual funds? ›

ETFs offer numerous advantages including diversification, liquidity, and lower expenses compared to many mutual funds. They can also help minimize capital gains taxes. But these benefits can be offset by some downsides that include potentially lower returns with higher intraday volatility.

What is Fidelity's best performing ETF? ›

The largest Fidelity ETF is the Fidelity Wise Origin Bitcoin Fund FBTC with $9.93B in assets. In the last trailing year, the best-performing Fidelity ETF was FDIG at 71.37%. The most recent ETF launched in the Fidelity space was the Fidelity Yield Enhanced Equity ETF FYEE on 04/11/24.

What is the downside to an ETF? ›

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

Why doesn't everyone just invest in ETFs? ›

One of the main reasons is that some investors believe they can outperform the market by actively selecting individual stocks or actively managed funds. While this is possible, it is not easy, and many studies have shown that the majority of active investors fail to beat the market consistently over the long term.

Should I just put my money in ETF? ›

ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.

What is the best ETF to invest $1000 in? ›

Vanguard S&P 500 ETF

ETFs are convenient and effective, to say the least. If you're interested in investing in an ETF and have $1,000 that you can spare to invest -- meaning you already have an emergency fund saved and have paid down any high-interest debt -- the Vanguard S&P 500 ETF (VOO 1.00%) is a great option.

Should I put all my money into ETF? ›

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all. Consider the two funds below.

Should I buy Fidelity 500 Index Fund? ›

Our recommendation for the best overall S&P 500 index fund is the Fidelity 500 Index Fund. With a 0.015% expense ratio, it's the cheapest on our list. And it doesn't have a minimum initial investment requirement, sales loads or trading fees.

What is the best index fund for beginners? ›

VFIAX and QQQM are often described as some of the best index funds for beginner investors.

What is the best Fidelity Index fund? ›

The 6 Best Fidelity Mutual Funds to Buy and Hold
Mutual fundExpense ratio
Fidelity 500 Index Fund (FXAIX)0.015%
Fidelity Total Market Index Fund (FSKAX)0.015%
Fidelity Zero International Index Fund (FZILX)0%
Fidelity Large Cap Value Index Fund (FLCOX)0.035%
2 more rows
Apr 10, 2024

Which is safer ETF or mutual fund? ›

Both are less risky than investing in individual stocks & bonds. ETFs and mutual funds both come with built-in diversification. One fund could include tens, hundreds, or even thousands of individual stocks or bonds in a single fund. So if 1 stock or bond is doing poorly, there's a chance that another is doing well.

What is the downside of ETFs? ›

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

Why are ETFs more risky than mutual funds? ›

The short answer is that it depends on the specific ETF or mutual fund in question. In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges.

Should I switch from mutual funds to ETFs? ›

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.

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