When it comes to investing, two of the most popular ways to build a diversified portfolio are exchange-traded funds (ETFs) and mutual funds. They might sound similar, but there are some key differences that could affect which option works best for you.
In this post, we’ll explain how ETFs and mutual funds compare, and why ETFs have become the go-to choice for many UK investors.
What are mutual funds?
- Structure: Mutual funds pool money from lots of investors and are managed by a fund manager.
- Access: You usually buy them directly from the provider or through an investment platform.
- Trading: Priced once a day, so you can only buy or sell at that price.
- Fees: Often higher than ETFs, as you’re paying for active management.
What are ETFs?
- Structure: ETFs also pool investors’ money, but they typically track an index (like the FTSE 100 or S&P 500).
- Access: Traded on the stock exchange, just like shares.
- Trading: You can buy or sell ETFs throughout the trading day at market prices.
- Fees: Generally lower than mutual funds because most ETFs are passively managed.
How they are managed
Mutual funds
- Most mutual funds are actively managed, meaning a fund manager and their team research, pick, and adjust investments with the aim of beating the market.
- This hands-on approach can offer potential outperformance, but it also raises costs and doesn’t always guarantee better results.
ETFs
- Most ETFs are passively managed, designed to follow the performance of a market index.
- This “track, not beat” approach keeps costs low and ensures investors get market-level returns (minus fees).
- Some ETFs are actively managed too, though these are less common.
Key differences at a glance
| Feature | ETFs | Mutual funds |
| Trading | All day on the stock exchange | Once a day after markets close |
| Costs | Usually lower | Often higher |
| Transparency | Daily holdings published | Holdings disclosed less frequently |
| Management style | Mostly passive, some active | Mostly active |
| Minimum investment | As little as £1 on InvestEngine | Can be £500+ depending on provider |
| Flexibility | Easy to buy/sell in real time | Less flexible |
Key differences in more detail
Here are the key differences between ETFs and mutual funds:
How they’re traded
One of the clearest points of difference between ETFs and mutual funds is how (and when) they are traded. Like stocks, ETFs can be traded intraday, meaning their price goes up and down over a given day and they can be bought and sold at any time if the market is open.
Mutual funds, on the other hand, are traded once per day and all investors trading on that day receive the same price. This is based on a calculation known as the net asset value. This, arguably, means that mutual funds are less flexible than ETFs.
Management
Another key difference is the degree to which each fund is managed. While they can be both actively and passively managed, most ETFs are passive investments that are pegged to indexes. That is to say that they try to reflect the performance of a particular index.
Mutual funds are also both active and passive, but the majority are actively managed. This means that fund managers made active decisions about what to include in the funds. This is a distinction that has been blurred in recent years, so it’s worth investors checking before making any decisions.
Fees
Generally speaking, actively managed mutual funds tend to come with higher fees and higher expense ratios than ETFs. This is simply the cost of active management. ETFs do have fees of their own, but they are relatively minor and are a result of being bought and sold like stocks.
Of course, with actively managed ETFs growing in popularity and passive index funds making up a large part of some mutual funds, this distinction is less reliable. It’s always worth researching fees before making any decisions on ETFs vs mutual funds.
Why ETFs are growing in popularity
- Low costs: Keeping more of your money invested.
- Transparency: You know what you’re invested in.
- Flexibility: Buy and sell whenever markets are open.
- Diversification: A single ETF can give exposure to hundreds of companies worldwide.
At InvestEngine, we’ve built our platform exclusively around ETFs. They’re transparent, cost-effective, and make it easy to build or automate a globally diversified portfolio.
Which is right for you?
Mutual funds may still appeal to investors who want a traditional, actively managed option. But for those looking for a low-cost, flexible, and transparent way to invest, ETFs are often the more efficient choice.
Important information
Capital at risk. The value of your investments may go down as well as up, and you may get back less than you invest.
ETF costs apply. If in doubt, you may wish to consult a professional adviser for guidance.
Tax treatment depends on your personal circumstances and may change in future. This article is for general information only and does not constitute financial advice.
When investing, your capital is at risk.