Exchange-traded funds (ETFs) have reshaped how portfolios can be built, maintained, and evaluated. This overview explains the practical differences between ETFs and mutual funds, and why those differences matter to investors.
Structural Advantages
ETFs and mutual funds may hold similar securities, but they function differently. Mutual funds are priced once per day at the end-of-day net asset value (NAV), whereas ETFs trade continuously on an exchange throughout the day¹. This intraday pricing allows active investors to respond quickly to market movements, manage risks, and seize opportunities as they arise.
Beyond pricing, ETFs have structural features, such as the creation/redemption mechanism, that support smoother portfolio operations and efficient handling of investor inflows and outflows. This allows ETFs to accommodate large-scale trades with minimal disruption, helping keep costs lower. Combined with intraday trading and liquidity, these features make ETFs a versatile tool for product sponsors and investors alike.
Cost and Tax Efficiency
ETFs are designed to help investors keep more of what they earn. Through the in-kind creation and redemption process, ETFs can often limit the realization of capital gains that would otherwise be distributed to shareholders, reducing unexpected taxable events. Additionally, many ETFs operate with lower expense ratios than comparable mutual funds, minimizing fees and leaving more capital invested.
Investors can combine these cost and tax benefits to maintain a more cost-effective portfolio. Those who take a less active approach may see the greatest impact from these efficiencies, while active investors also gain these benefits and can take advantage of ETFs’ structural flexibility, intraday trading, and liquidity. The rapid adoption of these benefits is reflected in the growth of ETFs, which now hold record levels of assets in the U.S.² These assets reached new all-time highs in November 2025, while mutual funds continue to experience outflows³ .
Thinking About Your Portfolio
Despite these advantages, many portfolios remain dominated by mutual funds. Why might some advisors not be using ETFs? Regardless of their reasoning, it’s worth considering how much more your portfolio could retain if fees and taxable events such as capital gains distributions were minimized. Even modest differences in cost and tax efficiency can translate into meaningful differences over time. A simple review of the numbers can reveal what investors may be leaving on the table.
Sources
¹U.S. Securities and Exchange Commission, Characteristics of Mutual Funds and Exchange-Traded Funds (ETFs): https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/characteristics-mutual-funds-exchange-traded-funds
²LSEG Lipper Alpha Insight, U.S ETF Industry Review – November 2025: https://lipperalpha.refinitiv.com/reports/2025/12/u-s-etf-industry-review-november-2025/
³Board of Governors of the Federal Reserve System, Implications of Growth in ETFs: Evidence from Mutual Fund to ETF Conversions (FEDS Notes): https://www.federalreserve.gov/econres/notes/feds-notes/implications-of-growth-in-etfs-evidence-from-mutual-fund-to-etf-conversions-20251119.html