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ETF vs Mutual Fund vs Index Fund: Which’s Better? A 2022 Guide.

etf vs mutual fund vs index fund
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The key difference among ETFs, mutual funds, and index funds is: you can trade ETFs as easy and flexible as stocks on exchange. ETFs are more liquid and convenient investment tools than conventional securities like mutual funds and index funds.

Investment innovations are more diverse and creative nowadays. You must have been amazed at the Investment innovations dating back to 20 years ago in the financial universe.

You may be bewildered by such a complex and various investing world regarding products offered by numerous financial institutions. The products are collective investment structures, whether an exchange-traded fund(ETF), a mutual fund, or an index fund.

What do they have in common, or how do they differ? You should find out if you plan to invest in one or all of them.

ETF vs. Mutual Fund vs. Index Fund: At a Glance

How they workETFMutual FundIndex Fund
Minimum investment amountTraded like a listed stock on an exchange; an ETF’s share is a minimum investment amountA Fixed or flat dollar amount or a minimum number of shares to be subscribedSame as a mutual fund
Fees1. Low-cost investment
2. Annual expense ratio 
3. One-time fees charged by brokers or for free
4. Bid/ask spread
5. Trading commission or for free
Annual management fee Sales charges, e.g., front-end, back-end load fees, Early withdrawal or redemption fees.Low-cost investment
Annual expense ratio
Management styleMost are passively-managed fundsActively-managed fundsMost are passively-managed funds
Trading methodContinuous prices on stock exchangesPossible differences between a price and net asset value per unit(NAV)Only one price quote at the end of a trading dayOnly one price quote at the end of a trading day
Tax efficiencyLower capital gains tax(if any) incurred due to lower turnover.Capital gains tax(if any) following redemptions are distributed to all unitholders.Like mutual funds, but with lower capital gains tax than mutual funds, due to lower turnover
business incline growth upward arrow trend background design

How are ETFs, Mutual Funds, and Index Funds Alike?

Fund structures

The three types are investment pools collecting individual or corporate funds for investment purposes. Every fund has specified its distinctive investment objectives and tools for reaching investment goals. 

They have the characteristics of the functions: 1. a fund manager assigned to administer and run a fund, 2. a custodian to hold customers’ funds separate from a fund company’s to protect clients’ assets.

Whether ETFs, mutual funds, or index funds, they should register with a government agency, such as the Securities and Exchange Commission or the Monetary Authority of Singapore, for operations.

Applicable to all funds, they should comply with strict regulatory procedures on semi- and annual reports, publications, or media releases for periodic fund returns and policy changes.


Holding considerable securities in portfolios, most ETFs, mutual funds, and index funds, effectively reduce default risks caused by a few corporations. 

By diversifying your investments in a fund, you carry fewer risks than an investor holding a couple of stocks for the same unit of return. In other words, you have a higher return from investing in a fund for the same risk born by a non-fund investor.

Fund managers may enhance diversification by using various tactics like hedging, buying commodities, or leveraging a portfolio to reduce risks. A well-diversified portfolio can protect clients from sudden and drastic changes in the market.

Long-term returns

According to research, long-term investment returns usually beat short-term speculation. Traders base their investing decisions on short-term factors to make contemporary profits and forfeit the prospect of higher future returns.

Short-term speculators use more complicated and frequent trade tactics, increasing the trading costs but not the investment return.

Besides, collective investment funds are idealistic vehicles for mid-to-long financial planning like education, retirement, and other financial goal-oriented investing. Both long-term investors and fund managers have clear investment objectives and time horizons to reduce short-term risks and costs and increase portfolio returns.

Broad market exposure

Investment funds, no matter the types, provide many benefits an individual investor may pay heavy fees to obtain if he does it alone. An international ETF or mutual fund can have quicker and easier access to global markets than a single investor. 

Other advantages include the economy of scale and bargain power. Fund managers can lower the cost of purchasing securities and find the best deals for investors with a vast fund size backup. A single investor with a modest sum may find it hard to get both benefits.

Unless specified otherwise, investment funds are highly liquid. Fund investors can redeem their investments in a few days from a diversified international fund without worrying about currency conversion and cost issues. Individual investors may spend a hard effort doing it from around the world.

Robo investing

Besides traditional brokerages, investors can use the Robo Advisor to buy the 3 types of funds.

A Robo Advisor is an AI-driven digital platform using algorithm calculations to find and invest in appropriate mutual funds, ETFs, and index funds for clients.

A Robo Advisor analyses an investor’s financial needs and requirements and tailor-make products or packages to clients. The investment platform also monitors and rebalances a client’s portfolio.

Some Robo Advisors create their investment products, e.g., funds of funds, by including various proportions of index funds, ETFs, and mutual funds. Investors should review if these products suit them by researching or consulting a human consultant.

Some Robo Advisors may not offer comprehensive investment services due to product limitations. Investors should check with the financial institutions for more details.

Investor styles

ETFs, mutual funds, and index funds fit three types of investors. 

1. Long-term savors like the hassle-free investment style the investment funds offer. A fee is the only cost an investor pays to a fund manager to run a fund. It is a hands-free investment so a client can focus on his business.

2. If a client is learning to invest, funds are the best and safest way to invest without requiring complex know-how. Index funds, exchange-traded or mutual funds are good stepping stones to start a sophisticated investing journey.

3. Active investors can mix the index funds, ETFs, and mutual funds to create portfolios to 

hedge and enhance returns. For example, a stock investor may include an international index fund or ETF to diversify portfolio risks. He may add mutual funds to increase portfolio return, but the risk may increase.

business man with watch watching laptop chart

How ETFs, Mutual Funds, and Index Funds Differ

The 3 types of funds have more in common than they differ, especially exchange-traded funds and index funds. Below are the main differences investors should consider while choosing a suitable type for investment.

How they trade


One characteristic that distinguishes the 3 funds is the way they trade. Like stocks listed on a stock exchange, ETF shares are tradable on the exchange floor. You may notice a continuous ETF price changes during trading hours. The share price you bought from an ETF most likely differs from others.

There may come to an occasion when an ETF price tag may deviate from the net asset value(NAV) of a share during market turbulence. Investors may arbitrate their differences to profit.

Mutual Fund

Mutual fund valuation differs from an ETF. A valuation for a mutual fund is only available at the end of a business day. Therefore, investors can buy a mutual fund after a fund company gives out a price quote: a valuation at the end of a business day.

Index Fund

Like a mutual fund, an index fund offers investors a buy or sell price quote for a trading day after valuation. Typically, orders for purchase or sale received at or before 4 pm on a business day are processed on the next business day. Orders after that time will be processed the business day after the next business day. The procedures apply to both mutual and index funds.

Management styles


An ETF is a fund tracking an index, a commodity, an industrial sector, or investment strategies. 2 types of ETFs are available: actively managed and passively-managed funds. Most ETFs are the latter. Managers of actively-managed ETFs use pro-active investment strategies, such as frequent trades or derivatives and hedging techniques to beat an index besides tracking an index.

Passively-managed ETFs buy securities from an index and hold investments for a duration. Passive investors believe most cannot outperform the market or an index long-term, so investing in a passively-managed fund is the best strategy.

Mutual Fund

As actively-managed mutual funds, the investment funds employ pro-active strategies like calls, puts, options and warrants, and other derivatives to outperform the market or indexes, like S& P 500 or Dow Jones Industrial Index. 

Index Fund

Also called Index mutual funds; they possess a passively-managed investment style and mutual fund characteristics. Tracking an index and holding securities from an index, they re-balance and re-allocate assets subject to index changes.

Like mutual funds, index funds have a valuation price only at the end of a trading day. Investors can buy or sell at a bid or offer price only at the end of a business day.



ETFs, especially passively-managed ETFs, offer the lowest expense ratios, among others. Generally, the costs do not exceed 0.1% due to the fund management nature. You should pay attention to the trading commission a broker may charge when trading an ETF. Some brokers do not charge a trade commission.

The final is a bid/ask spread. It is the difference between the price you sell and that you buy. 

Mutual Fund

Mutual funds have higher fees than the other 2 funds due to higher operating costs to cover more trade commission, research, and administrative costs.

High sales charges like front-end or backend loads can eat your profits. Besides, an early redemption fee may apply if you sell parts or all the shares within a specified period after investing in a fund.

Index Fund

Similar to ETFs, passively-managed index funds charge almost the same as ETFs. Lower costs involve lower expense ratios. ETFs charge 0,1% or below on an investment amount.

Tax efficiency

ETFs are more tax-efficient than mutual funds and index funds thanks to their structures


When you sell shares of an ETF, like stocks, a buyer of your shares pays you sales proceeds. You pay capital gains tax if the sale amount is more than the investment cost you paid.

Mutual Fund and Index Fund

Mutual funds or index funds have to sell your shares for cash and pay you when you request redemption. A capital gains tax(if a gain occurs) may incur and distribute to all fund shareholders before you receive the redemptions. The capital gains tax applies to all fund holders even if they do not realize or are at a loss.

Index Fund

Index Funds do not trade as frequently as mutual funds and incur fewer capital gains taxes than their counterparts.

Minimum investment amount


An ETF’s shares are tradable on exchanges. Therefore, you can buy a minimum of one share at the prevailing price quote without any minimum investment amount restrictions. Some brokerages even offer fractional share service to clients, and you may invest at a price lower than a share price of an ETF.

Mutual Fund and Index Fund

These 2 funds require a minimum initial and subsequent investment amount owing to the administrative and investment costs in processing fund purchases. But ETFs and mutual funds also allow fractional share investing. The minimum investment amount required varies depending on fund houses and can range from USD1500 to USD3000.

How to Choose the Right Funds

Factors are crucial in choosing a fund if you plan to invest.

  • Fees: High fees reduce your profit. As a cost-conscious investor, you should compare the charges of different funds. In this case, ETFs and Index funds are better if you give cost the first concern over others.
  • Return: You should choose mutual funds to outperform a market. Most ETFs and index funds invest in index components, so investors may find it challenging to beat the market using these funds.
  • Liquidity: ETFs are your option if you want to cash in your investments in a short time. Rather than queueing for a final quote at the end of a trading day and lengthy time of settlement with an index or mutual fund, you can convert an ETF on an exchange into cash like selling a stock.
  • Tax: If you think your tax bracket is higher than the fund’s in the future, you should consider an index fund or mutual fund as fund managers distribute the capital gains tax evenly among shareholders before sending you the money.

Want to know more? Check out our guide on How To Start Investing in an Index Fund.

To Sum Up

You should choose an appropriate investment based on your circumstances and the features offered by an ETF, mutual fund, or index fund. 

The main differences among ETFs, mutual funds, and index funds lie in the way they are traded, management styles like passive or active management, fund liquidity: how quick to convert into cash, fees: expense ratios, sales loads, redemption fees, and tax efficiency.

Key takeaway

  • ETFs and index funds are low-cost investments.
  • Mutual funds aim to outperform the market.
  • ETF shares are the most liquid-like stock trades.
  • Investors should choose an investment based on their preferences, circumstances, and fund features.

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