ETFs vs mutual funds in 2026 and the key differences investors should know
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Investors have a growing list of exchange traded funds (ETFs) and mutual funds to choose from as they consider ways to structure their investment portfolios, although there are important differences between the two types of funds.
ETFs have grown rapidly as an investment category in recent years since they were developed in the early 1990s, and the total assets of the ETF sector in the US are set to reach $13.5 trillion by the end of 2025 after increasing by 30% year over year, according to the Institute of Business & Finance.
Mutual funds has been around for a little over a century and IBF data shows that mutual funds had US$31.4 billion in assets at the end of last year, an estimated annual increase of about 10%.
“ETFs and mutual funds are both designed to help investors pool their money to invest in a broad mix of stocks or bonds, providing the benefits of diversification and professional management,” Kathy Kellert, head of index equity product at Vanguard, told FOX Business. “Many are index funds, where portfolio managers work to closely track a specific benchmark.”
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ETFs are growing faster than mutual funds in terms of total US assets, according to IBF data. (Jeenah Moon/Reuters)
For investors to consider the similarities and differences between ETFs and mutual funds as they weigh up which would be the best fit for their portfolio, there are several factors to consider – including how they trade, tax efficiency and whether they are actively or passively managed.
“Ultimately, both ETFs and mutual funds can play an important role in a good, long-term investment plan. The right choice depends on the investor’s preferences in terms of trading flexibility, tax considerations, and general financial goals,” said Kellert.
How do they trade?
Vanguard’s Kellert said, “ETFs are traded on an exchange throughout the day, like a stock, with prices updated in real time. Mutual funds, in contrast, are priced only once a day after the market closes, and all investors receive that end-of-day price. “
Rizwan Hussain, senior investment portfolio strategist at Schwab Asset Management, told FOX Business that the price of the ETF “reflects the prices of the underlying portfolio, providing investors with several incomes.”
The opening bell of the New York Stock Exchange in New York City, on May 28, 2025. (Adam Gray for Fox News Digital)
“But when you buy or sell ETF shares, the price may be less than the net asset value (or NAV) of the ETF. This discrepancy (also called the ‘bid/ask spread’) is often called, but for ETFs that are less traded, that may not be the case,” he said.
Hussain added that joint folders are executed once a day at a price based on net asset value (NAV) near the market.
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Tax efficiency
Kellert said ETFs are generally more versatile tax properly than mutual funds because of the way they trade and the processes fund managers use to rebalance ETF funds.
“Because ETF shares are often exchanged between investors, and portfolio activities, such as rebalancing, are often handled ‘in kind’ – using securities instead of cash – ETFs can likely avoid receiving large returns. Mutual funds, in contrast, may need to sell holdings to meet redemptions, which can produce dividends distributed to all shareholders,” he said.
Hussain noted that ETFs “may be able to generate small capital gains for investors as they may have low returns (especially passive ETFs) and may use a creation/redemption process to manage the cost basis of their assets.”
He added that due to these differences, mutual funds have been more suitable for investors who have stuck to them. tax deferred accounts.
Wedbush Securities analyst Dan Ives presents the AI ETF. (Stock)
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Functional and Transactional Management
Data from the IBF shows that for all ETFs and mutual funds, the number of managed carelessly Assets in US funds were approximately $19.3 trillion at the end of December 2025, compared to $17.4 billion in actively managed funds.
“Most ETFs are passive investments that are indexed to the performance of a specific index (‘passive’); however, ‘active’ ETFs have gained popularity in the last year in particular,” said Hussain.
There are also differences between ETFs and mutual funds in terms of how much they tend to disclose holding portfolioand ETFs typically make daily exposures while mutual funds have longer time horizons that can be profitable for active mutual fund managers.
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“ETF managers are generally required to disclose fund holdings on a daily basis, while mutual funds disclose full portfolio holdings at less frequent intervals, usually monthly or quarterly. This latter periodic disclosure is often beneficial to active mutual fund managers who want to avoid disclosing their strategy details to competitors,” added Hussain.
