How do ETFs compare with mutual funds?

ETFs and mutual funds serve the same general purpose. They provide exposure to particular markets or market segments. So it's not surprising that they share more similarities than differences.

 

Comparing ETFs and mutual funds

	ETFs	Mutual funds (Index/actively managed)
ACCESS	Shares bought and sold through a stockbroker or platform offering brokerage services	Shares bought and sold directly through the fund company or through a fund distributor
PRICING	Share prices set by a the market throughout the trading day	Net asset values determined once per trading day, after financial markets close
AVERAGE EXPENSE RATIO IN MEXICO	0.76%1	1.15%1
TRANSACTION COSTS	Brokerage commissions and bid-ask spreads on each direct purchase and sale	Sales charge (for most funds)
DIVIDEND REINVESTMENT	Availability depends on the broker or platform, who may charge for the service	Generally available at no charge
CLIENT SERVICES	Provided by the broker or platform	Provided by the fund company or distributor

¹ Source: Vanguard calculations using data from Morningstar as of December 31, 2018.

 

Similarities between ETFs and mutual funds

Diversification

By pooling money from many investors, ETFs and mutual funds have greater buying power, enabling them to buy many different securities in large quantities. This results in greater diversification than an investor can achieve buying individual stocks and bonds. ETFs, like mutual funds, can also provide diversified exposure to many segments of the market.

 

Regulation

ETFs in Mexico are regulated by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, “CNBV”). Under Mexican law, ETFs are not regulated as collective investment schemes (sociedades de inversion) governed by the relevant law (Ley de Sociedades de Inversion). Rather, ETFs, which are issued by Mexican trusts whose purpose is to track the performance of one or more underlying index, asset, or parameter. ETFs are listed on the stock exchange and treated similarly to corporate issuers.

 

Transparency

Compared with actively managed funds, indexed ETFs and index mutual funds are extremely transparent. Investors generally know what the holdings are and in what proportion based upon the target index, particularly when a full replication strategy is used to track the index. Learn more.

 

Differences between ETFs and mutual funds

Trading flexibility

Orders to buy or sell ETF shares are executed throughout the trading day at market-determined prices that change continually. On the other hand, an order to purchase or redeem mutual fund shares is executed at the end-of-day price, known as net asset value. Learn more.

 

Costs

Both ETFs and mutual funds charge an expense ratio which essentially covers ongoing operating costs. But because ETFs trade on exchanges, they also have unique costs not associated with mutual funds. Learn more.