ETFs vs mutual funds: choosing your investment

Exchange traded funds and mutual funds are both popular choices for retail investors across the world. Here’s a look into what they are, and how they compare.
Karolina Laas-Dobreva
Karolina Laas-Dobreva
Communications Manager
Published last month
4 minute read
Exchange traded funds and mutual funds are both popular choices for retail investors across the world. While sharing multiple similarities, there are also significant differences to consider before investing in either type of fund. Here’s a look into what ETFs and mutual funds are, and how they compare.
 ETFsMutual funds
TradingTrade on stock exchanges throughout the trading day.Trade once a day, after the end of the trading day.
PricePrice is based on market demand and fluctuates throughout the trading day.Price - referred to as net asset value (NAV) - is settled once a day, with all investors that day getting the same price.
FeesTransaction fees depending on the broker you use, plus ongoing annual costs by the asset manager. Operating fees, plus potential charges in sales loads or early redemption fees.
ManagementBoth can be managed actively or passively. Typically ETFs are managed passively (e.g. trackers) and have lower costs, while mutual funds are actively managed. 
Fund compositionBoth asset classes are funds, meaning they’re composed of a pool of instruments.
What is an ETF?
An exchange traded fund (ETF) is made up of a collection of stocks, bonds, or other securities. These funds are pooled investment vehicles that offer investors exposure to a particular area of the market.
Many are passively managed and track a specific index, but you can also find actively managed ETFs where fund managers aim to outperform an index. Other ETFs are structured on ESG principles, with a focus on investing in clean energy stocks or green bonds.
As its name suggests, ETFs are traded throughout the trading day on stock exchanges, just like single stocks. They’re also a great instrument for simple diversification — by investing in one ETF, you can invest in multiple different companies, regions or sectors at once.
Some of the best known indexes tracked by ETFs are the S&P 500 (tracking the performance of 500 of the largest companies listed US exchanges) or Nasdaq 100 (100 largest non-financial companies listed on the Nasdaq exchange). One advantage of investing in these kinds of ETFs is that it’s good for diversification: investing in the S&P 500, for example, can provide exposure to many of the biggest stocks in the index at a far lower upfront cost than buying shares in each company on a direct basis (and without the disadvantages associated with buying fractional shares yourself).
What is a mutual fund?
Mutual funds pool together money from individual investors to invest in a diversified pool of securities like stocks, bonds or money market instruments. Shares of a mutual fund are bought and held directly with the fund company issuing the shares.
Mutual fund orders are executed once per day, at which time the price of a mutual fund (referred to as NAV, or net asset value) is settled. Each fund has a different investment objective, which is described in the fund’s prospectus.
Mutual funds are generally managed by professional fund managers, who allocate the fund’s assets, with the aim of generating returns for the fund’s investors. Most of these funds are part of large investment companies such as Vanguard or Fidelity Investments.
What are the difference between ETFs and mutual funds

Similarities

  • Composition: both ETFs and mutual funds have a similar structure, where they consist of a pool of instruments, rather than representing a single one. That means both funds offer a good option for risk management through diversification.
  • Fund management type: both of these funds can be managed actively or passively, but ETFs tend to be managed passively - as the performance is linked to a specific index - and mutual funds are mostly the opposite, managed actively. The chosen fund management type can affect the costs for investors, as actively managed funds tend to be more expensive.

Differences

  • Fee structure: transaction fees for both funds will depend on your chosen platform. ETFs include ongoing annual costs, charged directly by the asset manager. Mutual funds carry similar operating fees, as well as potentially additional charges in sales loads or early redemption fees.
  • Trading: while ETFs trade throughout the trading day, mutual fund orders are executed once a day, with all investors on one day getting the same price (net asset value). The price of an ETF fluctuates constantly throughout the day and is based on market demand, just like with single stocks.
Buying ETFs and mutual funds
On Lightyear, you have commission-free access to hundreds of ETFs which can provide global exposure — from fund managers like Vanguard, iShares, Amundi and more. If you buy ETFs in the currency you already have on your Lightyear account, there will be no currency conversion fee included either.
For mutual funds, on Lightyear you’ll find BlackRock money market funds (MMFs), denominated in GBP, EUR and USD. MMFs are a great asset class to make use of today’s high interest rates, while maintaining high liquidity and diversification.
Disclaimer

Capital at risk, returns not guaranteed. Refer to funds’ prospectuses and key information documents before making investment decisions. Both can be accessed on Lightyear’s web and mobile apps and the fund managers’ websites.

Karolina Laas-Dobreva
Karolina Laas-Dobreva
Communications Manager
Karolina works as Communications Manager at Lightyear, sharing news about the platform as well as developments & research about the wider investing space across media and investor communities. She’s worked across communications and marketing in finance for over five years, building better ways for people across the globe to manage their money.