Should You Invest in ETFs or Mutual Funds?

. Whatever stage of investing you’re at, you’ve likely heard it before. But what does this mean, and how can you achieve it? One way is by investing in different types of funds. Two of the most common types of funds are 

ETFs and mutual funds are two types of funds. At large, a fund is made up of various stocks and other assets, often tracking a common index. However, ETFs and mutual funds behave differently from one another.

Let’s pull the cover off of ETFs and mutual funds so you can decide where they fit (or don’t fit) into your investment strategy.

 An ETF is a basket of securities that tracks an index. It trades on an exchange during open market hours, much like a stock.

ETFs can contain stocks, bonds, commodities, futures, and other securities.

ETFs can be passively managed (solely tracking an index) or actively managed (regularly adjusted by a portfolio manager). FYI: Active ETFs try to outperform the market—sometimes succeeding, sometimes not—but passive ETFs tend to have lower fees.

An ETF fee is measured by its “expense ratio.” In 2021, the average index equity ETF expense ratio was 0.16% (2).

When an ETF might make sense in your portfolio

ETFs offer built-in diversification (3). However, many are also thematic—meaning you can still customize your investment strategy to fit your unique needs. A thematic ETF follows a bespoke index that can track anything from high-dividend stocks to consumer staples, from renewable energy to cryptocurrency futures and beyond.

If you want to take diversification literally and focus on the broad market, you can do that too—investing in major indices like the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite.

Since ETFs trade throughout the day like stocks, they offer a level of liquidity other types of index funds do not. For highly involved investment strategies, this is a big perk.

Through brokerages like Magnifi, you can also invest in most ETFs through fractional shares. This allows you to start small, investing just a few dollars rather than buying an entire share. Through fractional ETF shares, you can build up your portfolio over time. According to 

, more than a fifth (21%) of investors think you need $1,000 to start investing—but today, that can’t be further from the truth.

Since most people adopt their own hybrid investing model that suits them, there’s no one red flag for a particular investment. However, it’s important to consider factors that may turn you off, like ETFs with high expense ratios whose returns don’t make up for it, or ETFs in risky sectors you’re not confident about.

By assessing your investment strategy, you can create your own hard lines in the sand. Use Magnifi Personal, a natural-language AI investing assistant, to search queries like “

,” and anything else that comes to mind.

 A mutual fund pools money from shareholders to invest in diversified securities. Prices do not fluctuate and trades are settled at the end of each trading day.

Mutual funds can contain stocks, bonds, commodities, futures, and other securities.

They can be passively managed or actively managed by money managers.

On average, mutual funds tend to have higher expense ratios than ETFs. In 2021, long-term mutual funds had an average expense ratio of 0.47% (4).

American Funds EuroPacific Growth Fund® (

When a mutual fund might make sense in your portfolio

Mutual funds also offer built-in diversification, and there are myriad options to choose from on the market today. Pricing for mutual funds tends to be more stable than ETFs because they’re only priced once per trading day. This can help investors of all kinds create a solid foundation for their portfolio without the risk of pricing fluctuating throughout the day.

That’s not to say there’s no risk involved in mutual funds (most investments carry some level of risk—that’s just the name of the game). However, mutual funds tend to align more with broader market trends than, say, thematic ETFs.

While many mutual funds do have a minimum buy-in, others are available for as little as a buck a share. Magnifi also offers fractional shares for some popular mutual funds, expanding the low-cost investor’s repertoire.

Whether or not mutual funds as a whole are right for you, or whether some may suit you better than others, depends on your strategy and the goals you hope to achieve through investing. Consider factors like expense ratios, historical rate of return, and underlying assets.

Write down your strategy and research mutual funds that do (and don’t) meet your terms. Consider inquiring about “

regional mutual funds with global exposure

,” and any other search that fits the bill.

How ETFs and mutual funds can complement each other in a diversified portfolio

In the ETF-versus-mutual-fund debate, the reality is that it’s not an either-or scenario. You have the capability to invest in both types of index funds, as well as other securities, to create a robust and diversified portfolio.

For example, you may choose to invest 20% of your portfolio in ETFs, 20% in mutual funds, 10% in individual stocks, 10% in bonds, and 40% in real estate. This is just a sample, and your portfolio may look way different. That’s okay! What matters is that you can make educated decisions that work in your favor.

For many investors, diversification is an ongoing process. With Magnifi Personal, you can get tailored recommendations to broaden your exposure for your retirement savings or other life goals. On the Magnifi platform, you can also search for specific ETFs and mutual funds based on factors like:

Geographic location (such as USA or international)

Market capitalization (such as large cap, mid cap, or small cap)

Bonds, commodities, and other types of assets outside of stocks

ESG (focused on environmental, social and governance criteria)

Then, you can quickly act on those recommendations if you choose to, knowing that the choice is, ultimately, yours.

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

“Trends in the Expenses and Fees of Funds, 2021” Investment Company Institute, March 2022, https://www.ici.org/system/files/2022-03/per28-02_2.pdf.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

All content is for information purposes only. It is not intended to provide the basis for any financial decisions. Investing always involves risk and possible loss of capital.

Advisory services are offered through Magnifi LLC, an SEC Registered Investment Advisor. Being registered as an investment adviser does not imply a certain level of skill or training. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services. This material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.

Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. All information and ideas should be discussed in detail with your individual adviser prior to implementation.

Get instant access to market data, trends, investing guidance, and on-demand analysis with Magnifi, an AI-powered investing platform.

Invest in ETFs or Mutual Funds?

Investing in exchange traded funds and mutual funds can help you add diversification to your portfolio. How do you decide which one is right for you?

Table of contents

5 Financial Ratios to Evaluate an Investment

Financial ratios are great tools to measure a companys financial health. See how earnings per share (EPS); price to earnings (P/E); price to book (P/B); quick ratio; and debt to equity can help you learn more about your investments.

How to Invest in Cloud Computing

Cloud computing offers a frontier of investment opportunities as companies in cloud-based software, hardware, data, and more strive to create solutions for the next big thing.

How to Invest in Small Caps

Growth in a small-cap company could reap lucrative returns for investors who spot it early as the next big thing. But does a small caps risk outweigh its potential reward? Here are ways to answer this question.