Is an ETF More Risky Than a Mutual Fund? | Wiser Wealth Management (2024)

By Last Updated: June 30, 2023

Is an ETF More Risky Than a Mutual Fund? | Wiser Wealth Management (1)

Pros and Cons of ETFs and Mutual Funds

When it comes to investing, the options can be overwhelming. From stocks to bonds, real estate to precious metals, there are a variety of ways to grow your wealth. Two popular investment options are exchange-traded funds (ETFs) and mutual funds. While both have their pros and cons, many people wonder whether ETFs are riskier than mutual funds. In this blog post, we’ll explore the similarities and differences between these two investment options, and help you determine which one may be right for you.

What Are ETFs and Mutual Funds?

An ETF is a type of investment fund that holds a diversified portfolio of stocks, bonds, commodities, or other securities. Like stocks, ETFs are traded on stock exchanges and can be bought and sold throughout the day. The price of an ETF is determined by supply and demand and can fluctuate throughout the day in response to market conditions.

A mutual fund, on the other hand, is a type of investment fund that pools money from a large number of investors to purchase a diversified portfolio of stocks, bonds, or other securities. Unlike ETFs, mutual funds are priced once per day after the markets close. You can buy or sell shares in a mutual fund through the fund company, usually at the end-of-day net asset value (NAV) price.

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. Their value can fluctuate throughout the day in response to market conditions. This means that if the market takes a dip, the value of your ETF could drop quickly, and you could experience significant losses.

On the other hand, mutual funds are priced once per day, so the value of your investment won’t fluctuate as much throughout the day. This can provide a sense of stability and reduce the risk of sudden losses.

However, it’s important to note that the underlying investments held by the ETF or mutual fund can also impact their risk level. For example, a mutual fund that invests in high-yield bonds may be riskier than an ETF that invests in blue-chip stocks. It’s essential to consider the investment objectives, strategies, and holdings of each fund before making an investment decision.

Benefits of ETFs

One of the biggest benefits of ETFs is their flexibility. Because ETFs are traded like stocks, you can buy and sell shares at any time during market hours. This makes them a convenient investment option for those who want to quickly respond to market changes.

ETFs are also often more tax-efficient than mutual funds. Because ETFs are traded on an exchange, investors can buy and sell shares without triggering a taxable event. This means that you won’t have to pay taxes on any capital gains until you sell your ETF shares.

Benefits of Mutual Funds

One of the biggest benefits of mutual funds is that they are easy to understand and access. Many mutual funds are actively managed, which means that a professional fund manager is responsible for making investment decisions on behalf of the fund’s investors. This can be a good option for those who don’t have the time or expertise to manage their investments themselves.

Mutual funds are also typically more accessible to smaller investors. Many mutual funds have low investment minimums, making them an affordable option for those who are just starting out.

Which is better?

In conclusion, both ETFs and mutual funds have their pros and cons, and the right choice for you will depend on your investment objectives.

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Casey Smith
President, Wiser Wealth Management


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Is an ETF More Risky Than a Mutual Fund? | Wiser Wealth Management (2024)


Is an ETF More Risky Than a Mutual Fund? | Wiser Wealth Management? ›

In general, ETFs can be more risky than mutual funds because they are traded on stock exchanges. Their value can fluctuate throughout the day in response to market conditions.

Are mutual funds more risky? ›

Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circ*mstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees.

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.

Which fund has the highest risk associated? ›

Generally, equity funds are known to inherently carry the highest risk, followed by hybrid funds and, finally, debt funds. There can be variations in risk levels within the category of equity funds, too.

What is one advantage on an ETF over a mutual fund? ›

ETFs typically have lower expense ratios than mutual funds because more of them are passively managed. In recent years, though, mutual funds fees have dropped their fees, which are now closer to ETF fees.

Are ETFs high risk? ›

ETFs are considered to be low-risk investments because they are low-cost and hold a basket of stocks or other securities, increasing diversification. For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio.

Which is better, ETF or mutual fund? ›

ETFs can be more tax-efficient than actively managed funds due to their lower turnover and fewer transactions that produce capital gains. ETFs are bought and sold on an exchange throughout the day while mutual funds can be bought or sold only once a day at the latest closing price.

Is an ETF riskier than a mutual fund? ›

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.

Why shouldn't you invest in ETFs? ›

Limitations of ETF investments

Reduced potential for returns: Due to their passive tracking of an index, ETFs may not exhibit significant outperformance of the market over the long term when compared to actively managed funds.

Why am I losing money with ETFs? ›

Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.

What is the riskiest type of fund? ›

Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day.

What is the most risk form of investment? ›

The 10 Riskiest Investments
  1. Options. An option allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. ...
  2. Futures. ...
  3. Oil and Gas Exploratory Drilling. ...
  4. Limited Partnerships. ...
  5. Penny Stocks. ...
  6. Alternative Investments. ...
  7. High-Yield Bonds. ...
  8. Leveraged ETFs.

What is the safest investment with the highest return? ›

These seven low-risk but potentially high-return investment options can get the job done:
  • Money market funds.
  • Dividend stocks.
  • Bank certificates of deposit.
  • Annuities.
  • Bond funds.
  • High-yield savings accounts.
  • 60/40 mix of stocks and bonds.
5 days ago

What is the primary disadvantage of an ETF? ›

ETF trading risk

Spreads can vary over time as well, being small one day and wide the next. What's worse, an ETF's liquidity can be superficial: The ETF may trade one penny wide for the first 100 shares, but to sell 10,000 shares quickly, you might have to pay a quarter spread.

What are the disadvantages of ETFs compared to mutual funds? ›

ETFs often generate fewer capital gains for investors than mutual funds. This is partly because so many of them are passively managed and don't change their holdings that often. However, ETFs also have a structural ability, called the in-kind creation/redemption mechanism, to minimize the capital gains they distribute.

Should I sell my mutual funds and buy 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.

Why are mutual funds considered a high risk? ›

The primary reason why mutual funds are considered to be risky deals is due to the fact that the returns they offer are not stable or guaranteed. Since the performance of the fund is linked to the movement of the market, mutual funds only offer returns if the market performs well.

Which is more risky mutual funds or stocks? ›

All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.

What is downside in mutual fund? ›

Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.

Do mutual funds carry a real risk? ›

All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.

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