If you’re saving for retirement, building a portfolio, or just trying to make your money work harder, you’ve probably heard about mutual funds and ETFs (exchange-traded funds). Both offer ways to invest in a broad mix of stocks, bonds, or other assets—but they’re built differently, and those differences matter.
Let’s break down what makes each one unique, where they came from, how they compare, and which might be the better fit for your goals.
A Personal Note: Why I Prefer ETFs
I’ve used ETFs in client portfolios since 1998. At the time, I was a newly minted advisor at Morgan Stanley, the only firm I worked for prior to founding Harborview Investments (now known as Harborview Advisors). Even then, I believed ETFs offered the best way for me to help clients reach their goals.
Morgan Stanley was ahead of the curve. They were one of the few major firms producing in-depth ETF research. They even published a quarterly ETF book with ratings, strategy ideas, and sample portfolio allocations. That book shaped how I managed client portfolios early in my career—and it still influences my approach today.
I favor passive investing strategies, which aim to track the market rather than beat it. ETFs are a near-perfect fit for that philosophy—offering low costs, full transparency, tax efficiency, and real-time flexibility.
As for the active vs. passive debate—that’s a blog post for another day. For now, just know that I strongly believe passive strategies give my clients the best chance of long-term success.
A Quick History
Mutual Funds date back to 1924, when MFS Investment Management launched the Massachusetts Investors Trust in 1924 the first modern open-ended fund. It allowed everyday investors to pool their money and get professional management.
ETFs are much newer. The first U.S. ETF was the SPDR S&P 500 ETF Trust (SPY), launched in 1993 by State Street Global Advisors. Later, iShares (now part of BlackRock) played a major role in popularizing ETFs for a broader audience.
How They Work: Key Differences in Structure
Mutual Funds (Open-Ended):
Bought/sold once per day, at the fund’s net asset value (NAV) after market close.
Often come with minimum investment amounts and higher fees.
Still heavily used for active strategies, where managers try to outperform the market.
Can generate capital gains taxes, even if you didn’t sell your shares.
ETFs (Exchange-Traded Funds):
Trade throughout the day, like stocks.
No investment minimums beyond the price of one share.
Built to track an index, making them good for passive investing.
Tend to be more tax-efficient due to how ETF shares are created and redeemed.
Transparent—most ETFs publish their full holdings daily.
Cost Comparison: Why ETFs Often Win
Costs matter. ETFs tend to have lower expense ratios and fewer embedded fees than mutual funds.
Investment Type | Typical Expense Ratio | Other Fees |
|---|---|---|
ETFs | As low as 0.03% | No sales loads |
Mutual Funds | Often 0.50%–1.00%+ | May include loads or redemption fees |
These differences may look small—but over years or decades, they can add up to thousands of dollars in savings.
The Biggest ETFs Today
As of 2025, ETFs have grown into some of the largest investment vehicles in the world:
Vanguard S&P 500 ETF (VOO) – Now the largest ETF by assets, recently surpassing SPY.
SPDR S&P 500 ETF Trust (SPY) – The original ETF, still massively popular.
iShares Core S&P 500 ETF (IVV) – Another strong, low-cost choice tracking the same index.
All three track the S&P 500, but differ slightly in cost, structure, and trading behavior.
Why Mutual Funds Still Exist
Although I don’t often use mutual funds in portfolios, they still have a place for some investors. Many active strategies—especially complex or specialized ones—are still only available through mutual funds. I also often have new clients that bring me portfolios that hold mutual funds and I have to work around them to maintain tax efficiency but I prefer to utilize ETFs where I can.
That’s mostly because:
ETFs require daily transparency, which some active managers avoid.
Some asset classes don’t fit easily into the ETF structure.
Mutual funds work well for automatic investment plans and retirement plans like 401(k)s.
But for my clients and philosophy, ETFs check every box.
Quick Comparison
Feature | Mutual Funds | ETFs |
|---|---|---|
Buy/Sell Timing | End of day (NAV) | Anytime during trading hours |
Trading Flexibility | Limited | High |
Minimum Investment | Varies but often higher. | Cost of one share |
Expense Ratios | Often Higher | Often Lower |
Tax Efficiency | Often less efficient | Often more efficient |
Active Management | Common | Available, but less common |
Transparency | Typically quarterly | Daily holdings published |
Final Thought
I’ve believed in ETFs since before they were mainstream. Over the last two decades, they’ve evolved into the most efficient, flexible, and cost-effective way to build a portfolio. That’s why I use only ETFs today—and why I continue to believe they offer the best opportunity for long-term investment success.
Whether you’re new to investing or already building your wealth, understanding what you own—and why you own it—is key
