ETFs vs. Mutual Funds: The Same, But (Very) Different


  • Both are basically baskets of investments and offer a diverse range of investment types and strategies;
  • Because a single fund can hold hundreds of individual stocks, bonds or other types of investment instruments, both ETFs and mutual funds can help mitigate investment risk; and
  • Both are professionally designed and managed, ensuring investors of a certain level of trustworthiness and credibility. But the similarities stop there.
  • ETFs and mutual funds sometimes have significant differences in everything from fees and expenses, accessibility and minimum investments, to tax efficiency and trading costs. Both ETFs and mutual funds can be a viable part of an investor’s strategy. Which is the better choice depends in large part on an investor’s overall goals and approach to investing. To make informed decisions about which product can best meet their needs, investors should understand the key differences between ETFs and mutual funds. We've outlined some of the key differences in Exhibit 1.

    Investor Demand

    At nearly $16 trillion, assets in U.S. mutual funds dwarf those in ETFs, which were estimated at just under $2 trillion at the end of 2014. But investments in ETFs are growing at an accelerated pace while mutual funds are just recovering from major outflows during the peak years of the recent financial crisis. Increased awareness among retail investors and their advisers has played a definite role in ETF growth. In turn, ETF sponsors are beginning to offer more varied funds, including ETFs that invest in particular market sectors, industries or commodities, as well as actively managed ETFs. Simultaneously, the mutual fund industry is seeing growth in the popularity of index mutual funds, particularly those indexed to the S&P 500 or other traditional domestic and international stock indexes. What do ETF and mutual fund investors look like demographically? As the table below shows, households that own ETFs have considerably higher income and financial assets than those that own mutual funds. They are also more highly educated with 64% having a four-year college degree or higher.

    It is interesting to note that ETF-owning households say they are more willing to accept greater investment risk for the possibility of higher return.

    Nearly half say they would take “substantial” or “above-average” risk for commensurate gains, as opposed to 31% of mutual funds owners and only 21% of all U.S. households. WHICH PRODUCT IS RIGHT FOR YOU? Selecting an investment depends on your unique goals, investment horizon and personal preference. A financial advisor can help you weigh the pros and cons of each option for your particular situation. Remember that both ETFs and mutual funds can help meet most investment objectives. Consider adding both to any portfolio to maximize exposure to different asset classes and investing strategies.

    For more information please visit us at Flex Shares .

    IMPORTANT RISK DISCLOSURE An investment in FlexShares is subject to investment risk, including the possible loss of principal amount invested. Funds’ returns may not match the returns of their respective Indexes. The Funds may invest in emerging and foreign markets, derivatives and concentrated sectors. In addition, the Funds may be subject to asset class risk, small cap stock risk, value investing risk, non-diversification risk, fluctuation of yield, income risk, interest rate/maturity risk, currency risk, passive investment risk, inflation protected security risk, market risk and manager risk. For a complete description of risks associated with each Fund, please refer to the prospectus.
    Before investing carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting Read the prospectus carefully before you invest. FlexShares ETFs are distributed by Foreside Fund Services, LLC, not affiliated with Northern Trust.