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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.