ETFs vs. Mutual Funds for Retirement

Diversification is important in investing, and products like mutual funds and Exchange Traded Funds (ETFs) are popular, simple ways to incorporate diversification into a portfolio.

ETFs and mutual funds are similar in many ways but there are also important differences, advantages and disadvantages that investors—particularly high net worth investors—should be aware of.

Basic Definitions: Mutual Funds versus ETFs

Mutual funds enable investors to purchase shares of stocks or other securities (such as bonds) in a pool with other investors. Shares of a mutual fund trade under its unique ticker symbol, just as a stock does. A fund’s investment strategy, as stated in its prospectus, determines the mix of securities the fund manager chooses to purchase and hold.

Investing in mutual funds allows you to gain exposure to a large number of companies, which can increase your portfolio’s diversification and exposure to different markets and sectors. This can be especially beneficial for small investors who don’t have the capital to purchase such a large group of individual securities.

The percentage of the mutual fund’s assets that each investor owns correlates with the amount the individual has invested. A mutual fund may hold hundreds, even thousands, of stocks or bonds. At the end of each trading day, the value of all of the fund’s underlying securities is calculated, and the price of one share of the fund, based on the value of its total holdings, is reported. For some types of funds, the share price fluctuates, based on supply and demand.

Some mutual fund managers use an active strategy, though “passive” or indexed funds are also common. Many mutual funds are open-ended, meaning an unlimited number of shares can be issued on an ongoing basis. Mutual funds can also be close-ended, meaning only a specified number of shares are issued when the fund is first offered for sale to the public.

Shares of most open-ended funds are bought and sold at their Net Assessed Value (NAV). Closed-ended funds may trade above or below their NAV, based on supply and demand. Both types of funds have tax ramifications; for example, you might have to pay annual taxes if a mutual fund distributes earnings or other payouts before the end of the year—even if you don’t haven’t sold any of your shares.*

Exchange Traded Funds (ETFs) are similar to mutual funds in that they also invest in a pool of assets and each shareholder owns a percentage of the entire investment portfolio. However, rather than selecting a group of stocks to implement an active investment strategy, many ETFs select securities to mirror a specific index. The ETF universe is wide: You can find an ETF to track everything from global equity to gold futures. Unlike mutual funds, ETF shares can be bought or sold throughout the day and the price can fluctuate above or below the fund’s NAV based on market activity.

Essentially, ETFs make it as easy for you to invest in an index as it is to purchase shares of stock on a major exchange.

ETFs and Mutual Funds: How Are They Different?

One of the most important differences is that mutual fund fees tend to be higher than those of ETFs. Mutual fund fees vary, and the ones that are actively managed generally charge higher fees. Before investing in mutual funds, it’s wise to be aware of any possible tax consequences, as well as the fact that mutual funds offer less trading flexibility than ETFs or individual stocks.


Active Mutual Funds

Index Mutual Funds

Exchange Traded Funds


As a result of active management, active mutual funds generally charge higher management fees and have higher expenses.

An index fund mirrors the performance of a specific index, such as the S&P 500. Expenses are therefore lower than actively managed funds, but are still typically higher than the expenses for ETFs.

ETFs generally have lower management fees and expenses than mutual or index funds due to minimal transaction costs.


Realized capital gains can be distributed to shareholders, creating tax consequences—regardless of how long an investor has held shares.

Individual shareholder redemptions cause these funds to sell securities to generate cash; this creates a tax consequence for all shareholders.

ETFs are unaffected by other shareholder purchases or redemptions.

Trading Flexibility

Shares are sold and bought only after the market closes each day.

Shares are sold and bought only after the market closes each day.

ETFs, like individual stocks, trade during the day

Pros and Cons of ETFs vs. Mutual Funds

Mutual funds can help smaller investors diversify, but for high net worth individuals, there are several drawbacks:

  • You may end up paying more in fees than you anticipate. In addition to management fees, investors may be subject to other costs and fees such as trading costs, 12b-1 marketing fees and sales loads.
  • You won’t benefit from a customized investment strategy. Don’t count on having a lunch meeting with the fund manager to tailor your portfolio to match your financial goals, risk tolerance, cash flow needs or return expectations.

Investors tend to sell in and out of funds too quickly and end up doing the opposite of what would serve them best. You can’t reap the benefit of even high-performing funds if you sell too soon. When the market is high, investors who want in on the action rush to buy mutual funds; then, when the market dips, they become fearful and sell out. This is the classic buy-high/sell-low mistake—and the opposite of what investors should be doing. The chart below provides some more insight into when investors will choose to buy into, and sell out of, mutual funds.

So how hard is it to stay invested? DALBAR, a market research firm, studies this concept in its yearly analysis. Based on the twenty years ending in 2015, the average holding period for the average equity fund investor was just 3.3 years*—that’s only part of a full market cycle, which is about half the duration of the average bull market.

Hypothetical Growth of $1 Million Dollars Invested 20 Years, 12/31/1995 - 12/31/2015


Source: “Quantitative Analysis of Investor Behavior, 2016,” DALBAR, Inc. "

Key Points to Consider

For investors with smaller portfolios, mutual funds and ETFs can be a cost-effective way to diversify holdings.

Investors with larger portfolios may have better options. Given fund shortcomings and costs, high net worth investors may be better off holding stocks directly in some cases.

Fund fee structures also need to be considered. Though ETFs may have lower fees than mutual funds, investors still need to be aware of all management fees, sales loads and other costs before buying. These fees can add up and actually make it more expensive to own mutual funds and ETFs than to hold the underlying assets directly. Remember, too, that investing in an actively managed fund won’t get you a customized investment plan—just higher fees.

As the number of mutual funds and ETF continues to increase, understanding what the underlying assets are, how well the fund fits your investing strategy, and the fees you will pay can become more complex and time-consuming.

Having a customized plan and professional guidance is especially important for high net worth individuals. Fisher Investments can arrange for one of our professionals to provide a free portfolio evaluation and discuss any current ETF and mutual fund holdings.* Request an appointment or your copy of our informative guides to learn more.

* The contents of this document should not be construed as tax advice. Please contact your tax professional

**For qualified investors with $500,000 or more in investable assets.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns.
Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations.