ETFs vs Mutual Funds for Retirement: Part I

ETFs and mutual funds are both products commonly used to get equity exposure. They’re often confused, but have important differences. Learning more about the advantages and disadvantages of ETFs vs mutual funds can help distinguish your retirement strategy from being a huge success or a major flop.

An Exchange Traded Fund (ETF) generally seeks to mimic an index. It can be based on anything from the S&P 500 to gold futures to small-cap Emerging Markets. ETFs rely on a “passive strategy” where investors buy and hold regardless of what happens in the market

Mutual Funds are commonly used by mom-and-pop investors to get exposure to “active management”. These funds can have anywhere from hundreds to thousands of underlying stocks, brought together under one name. They are then traded under a ticker and fluctuate depending on supply and demand—but their values are calculated at set times, unlike a stock which fluctuates throughout the day.

How are ETFs different than mutual funds?


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

There are positives and negatives associated with each of these types of funds. Let’s start with ETFs.

In a passive investing strategy, an investor purchases an ETF and holds it, theoretically forever—come what may. The idea is that liquid markets (stocks, bonds, etc.) are simply too rational and efficient to beat so investors are better off with a return only slightly behind an index’s long-term return (due to fees).

This makes sense in theory, but can be emotionally difficult. Buying passive products is easy but so is selling them. Many investors can’t help but sell off their ETFs in periods of volatility. Simply buying an ETF doesn’t make you a passive investor, rather extreme disciple does. You have to define investment your goals, select an asset allocation and then hold on, no matter what. This means not veering from the selected index fund out of fear or greed. Shifting at other points is an active choice.

The number of investors who can do this is very small and failure at any one of these steps can hamper your financial goals. The biggest problem with passivity is the sheer emotional challenge. Most folks aren’t robotic enough to successfully weather all a market can throw at them.

Takeaway: Passive investing is one of the most difficult feats in investing and knowing when to choose an ETF vs a mutual fund can make a big difference during your retirement investing planning stage. 

Now let’s take a look at mutual funds—click here.