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I noticed in one of the responses to a recent article that someone expressed some concern about investing in ETFs as opposed to Mutual Funds. I thought if might be helpful to talk about this topic. To help open the discussion here is a link to FINRA’s page on the topic:
https://www.finra.org/investors/insights/etf-vs-mutual-fund
Just one more advantage not mentioned in that summary, is that gifting mutual fund shares is hard to do, whereas gifting ETFs is relatively easy. To gift appreciated ETFs to my grandchildren (over 18), I have just had them open an account at Schwab and then send me the account number. Schwab has a form on line (you can also print) which you can complete and submit and presto in a day or two the shares show up in their account. I can also specific which lots are involved in the gift…With mutual funds, you might be looking at a trip to the bank for a signature guarantee for a substantial gift.
If you like ETFs, Why? If you worry about ETFs Why?
As David Powell mentions in the comments, the market price of a share of an ETF can differ significantly from the ETF’s NAV for brief periods of time during periods of market volatility. Hence, it is advisable to use a limit order, instead of a market order, for trading ETF shares in order to ensure that the transaction will occur at a share price that is comparable to your intended price.
1. ETFs offer flexibility and efficiency
ETFs trade like stocks, which means you can buy or sell them throughout the day at real-time prices. This gives investors more control over timing and execution, something mutual funds can’t provide since they’re priced only once per day.
2. Lower cost and tax efficiency
Most ETFs, especially index-based ones, have lower expense ratios than mutual funds. They also tend to be more tax-efficient because of how shares are created and redeemed, reducing unwanted capital gains distributions.
3. Gifting and portability
You’re absolutely right — ETFs are easier to gift and transfer between accounts. Mutual funds often involve more paperwork, restrictions, or even different share classes at various firms. The simplicity of gifting ETFs directly through brokerages like Schwab is a real, practical advantage.
4. Where mutual funds still make sense
For investors who prefer automatic investing or dollar-cost averaging without trading fees, mutual funds can still be a good fit — especially inside retirement plans. They’re also useful for those who prefer not to think about intra-day price movement.
In short:
ETFs win on flexibility, cost, and tax treatment. Mutual funds still fit investors who value simplicity and automation. The right choice depends on how hands-on you want to be — not just which product looks better on paper.
I prefer ETFs. Lower expense ratios, more precise tax loss harvesting. I like to watch my portfolio move during the trading day. And I can buy Vanguard ETFs at Fidelity and Schwab for no fee.
i prefer ETFs, especially in a taxable account, as they don’t distribute capital gains like mutual funds. I also somewhat like being to trade intra-day rather than day’s end.
It seems some mutual funds have adopted a structure that allows them to retain gains and not distribute them. The last mutual fund I own (DFA) in a taxable account used to distribute large gains every year until last year. When I contacted DFA they said they said that for most of their funds they will no longer distribute capital gains to improve tax efficiency. If more funds adopted such a structure, it may eliminate some need to use ETFs in taxable accounts.
They use the dual share class structure formerly patented by Vanguard to flush out the capital gains through the ETF share class.
Back 5 years ago, I changed all Mutual funds to smilier ETF’s. I much prefer the ETF’s, as you know when you buy or sell the price, you do not have to wait until the market is closed for the day. Just seem simpler to me and everything has worked just fine, no issues.
Thanks for these comments. Before reading this article, I was having a hard time imagining why any thoughtful person would prefer MFs over ETFs. Now I understand a bit better.
I prefer ETFs because of their transparency compared to MFs, but now I can see that for some MFs are easier to deal with, not to mention that they’ve been around longer and Vanguard used a patent to protect their early to market advantage for a long time.
The best advice I’ve received on buying / selling ETF shares is to avoid transactions near market open or close. The bid/ask spreads during the trading day are usually within a penny per share for the broad, liquid funds that HD types tend to own. Spreads are a non-issue over the course of time that you’ll own the investment.
Another advantage of ETFs over Mutual Funds is the ability to buy ETFs with smaller investments. Example is Vanguard. In Non-IRA accounts many funds have $3,000 minimums. The ETF equivalent does not.
Vanguard Personal Advisors Service has been encouraging transferring MFs to ETFs for at least the past 5 years. All my holdings are in ETFs.
The biggest issue I’ve faced with Mutual Funds is the capital gains distribution which for some Vanguard Funds (Health Care, Dividend Growth) can be up to 10%. If you are trying to control your income close to one of the “cliff” thresholds (ACA or IRMAA) then these “random” distributions can accidently put you over the limit.
It is worth to mention that since “dual-share class” of Vanguard patent expired, many mutual funds companies have created an Exchange-Traded Fund (ETF) share class for its existing mutual funds. Once of advantage would make existing mutual fund more tax efficiency, it also allows existing mutual fund exchange shares for ETF shares in non-taxable event.
In any sensible medium to long term horizon we shouldn’t care. Obviously where trading or holding costs differ there may be an advantage to one. Plus ETF has the advantage when it comes to absolute cashflow certainty at a granular level (perhaps handy if you’re trying to hit a tax band exactly etc).
Not sure where the idea that it’s hard to gift mutual fund shares is coming from. I have gifted shares of mutual funds, ETFs and individual stocks held at Fidelity, and they were all easily handled just as you describe your own ETF gifting experience.
To add… in fact, there wasn’t even a form. I gave Fidelity the destination account info over the phone.
Mutual funds are just easier on my brain. So, if a mutual fund is low cost I would rather use it in traditional and roth accounts.
But, I think the tax advantages of ETFs in taxable accounts are worth the annoyance of trading them. So, almost all my funds in taxable are ETFs, the exception being some mutual funds that were from long ago, have some large capital gains, and are not eligible to be convertible to ETFs.
I suspect that was one of my comments. I have held mutual funds, mostly the same ones I hold today, since well before ETFs were thought of. Currently, aside from the money market fund in taxable, the only time I touch the funds is once a year when I take QCDs and my RMD, and rebalance if I feel it’s necessary. Aside from QCDs I have no plans to gift shares to anybody – my heirs will have to wait until they are my heirs.
I don’t want to have to worry about bid/ask spreads and market vs limit orders. I also don’t like the fact that the price can deviate from the NAV. Maybe it will go higher, but it might also go lower.
How would you feel about grocery shopping where the price after you put an item into your cart is constantly changing until it is rung up by the cashier and the price for the same item is different for the person in line front of you and different again for the person behind you? That is how I feel when trading ETFs. But I do have ETFs when there is not a Mutual Fund alternative with the same low expenses and trading fees.
The mutual fund is experiencing the same thing throughout the day with its investments. You just do not see those transactions or the bid ask spreads in every trade they do.
Yeah, but the flip side of that is you buy the groceries at Noon, but you don’t find out how much you paid for them until 4:30.
In a stressed market, like during the March 2020 pandemic meltdown, some ETFs diverged quite a lot from underlying net asset value, perhaps due to liquidity issues. A Vanguard corporate bond fund (VCSH) behaved that way on at least one trading day I remember well.
If you’re trading a stock index mutual fund, you know how much the index has moved at any moment in the trading day and can check the index before entering an order.
All of this is less than rounding error if you’re looking at the difference between ETF intraday prices and mutual fund closing price for shares held over many years. It’s not worth fussing about.
May be my imagination, but I see a pattern. If the S&P index moves positive over most of the day, I often see in the last half hour or so it dips a bit, kind of profit taking or day trading impact at the end of the day. I am a long term investor and it does not matter. I have no ETFs, only MFs.
However, if one is invested in a SP500 mutual fund and also in its ETF, can one use that pattern as a guide to execute an ETF trade?
I put this in the category of things we really shouldn’t lose sleep over. At Vanguard they’re just different wrappers for the same fund. They each have pros and cons which will be uniquely weighted for our own situations. We’re talking very short strokes for long-term, buy-and-hold investors.
Well said!
The main reason I like ETFs is that transactions can be executed immediately. With mutual funds, selling or buying orders wait until the end of day. So if I’m replacing a mutual fund with a different investment, it takes me more than 1 day to execute the change. I also like to know what the price will be when executing, not after the trade is done. Lastly, I don’t like capital gain distributions; makes it harder to manage taxable income. Not all mutual funds have those so not always an issue.
That said, I do have some mutual funds (bought a long time ago) and one of my favorites is FXAIX which is an S&P500 index fund with a low cost of 0.015%.
Several years ago, when we started doing substantial investments in our taxable brokerage, I was faced with the decision of MFs or ETFs. I had never invested in ETFs before.
On the Vanguard website I looked into both, and I wanted to do ETFs, but in the end the bid/ask situation spooked me, so I chickened out and went with MFs which I was familiar with and straightforward.
Now a few years on, and seeing the prevalence and other advantages of ETFs, I sort of regret it and would recommend ETFs to people. But there’s nothing wrong with mutual funds. I just think it’s clear that ETFs are the future.
If you are with Vanguard I believe that swapping mutual funds for the equivalent ETFs is straightforward and doesn’t currently incur taxes. I share your issue with the bid/ask spread.