How Do I Invest in ETFs vs. Mutual Funds?

How Do I Invest in ETFs vs. Mutual Funds?

When it comes to building a diversified investment portfolio, two of the most popular choices are Exchange-Traded Funds (ETFs) and Mutual Funds. While both offer a way to invest in a wide range of assets—such as stocks, bonds, or commodities—they differ in structure, management, costs, and how you buy or sell them.

So, how do you invest in ETFs vs. Mutual Funds? And which is right for your financial goals?

In this blog post, we’ll break down the key differences between ETFs and mutual funds, how to invest in each, their pros and cons, and how to choose the best option based on your investing style.

What Are ETFs and Mutual Funds?

Before we dive into the “how,” let’s start with the “what.”

What Is an ETF?

An Exchange-Traded Fund (ETF) is a basket of securities—like a mutual fund—but it trades on a stock exchange, just like individual stocks. ETFs can track an index (like the S&P 500), a sector (like tech or healthcare), or even a commodity (like gold).

• Price fluctuates throughout the day
• Can be bought and sold in real-time
• Typically passively managed (though actively managed ETFs exist)

What Is a Mutual Fund?

A Mutual Fund is also a collection of assets pooled from multiple investors, but it’s typically actively managed by a professional fund manager. You buy or sell mutual fund shares directly through the fund company or brokerage, and they’re priced only once per day—at the close of the market (Net Asset Value, or NAV).

• Priced at end-of-day NAV
• Often actively managed
• May have minimum investment requirements

How to Invest in ETFs

Investing in ETFs is quite straightforward, especially for those already familiar with buying stocks. Here’s a step-by-step guide:

1. Open a Brokerage Account

To invest in ETFs, you’ll need a brokerage account. Some popular options include:

• Fidelity
• Vanguard
• Charles Schwab
• Robinhood
• E*TRADE
• TD Ameritrade

Many of these platforms offer commission-free trading on ETFs, which makes investing more cost-efficient.

2. Fund Your Account

Transfer money into your brokerage account via bank transfer or direct deposit. Some platforms allow instant transfers up to a limit.

3. Choose Your ETFs

Here are a few types of ETFs you might consider:

• Index ETFs – Track major indexes like the S&P 500 (e.g., SPY, VOO)
• Sector ETFs – Focus on sectors like technology (e.g., XLK) or healthcare (e.g., XLV)
• Bond ETFs – Include government or corporate bonds (e.g., BND)
• Dividend ETFs – Focus on income-generating stocks (e.g., VYM)

Use screeners or tools from your brokerage to filter by expense ratio, performance, dividend yield, etc.

4. Place a Trade

When placing an order for an ETF, you can choose:

• Market Order – Buy at the current market price
• Limit Order – Buy only at a specific price or better

Because ETFs trade like stocks, your order executes in real time during market hours.

5. Monitor and Rebalance

Check your portfolio periodically. Over time, you may need to rebalance if one sector or ETF grows too large relative to your overall goals.

How to Invest in Mutual Funds

Mutual funds are also widely accessible, especially through employer-sponsored retirement plans like 401(k)s. Here’s how to get started:

1. Open a Brokerage or Fund Account

You can invest in mutual funds through:

• Fund providers like Vanguard, Fidelity, or T. Rowe Price
• Brokerage platforms like Charles Schwab or E*TRADE
• Employer-sponsored plans (401(k), 403(b), etc.)

Some mutual funds are proprietary, meaning they’re only available through a specific company (e.g., Vanguard funds on Vanguard’s platform).

2. Meet the Minimum Investment

Most mutual funds have minimum investment requirements, often ranging from $500 to $3,000. Some brokers waive these for retirement accounts or automatic contributions.

3. Choose Your Mutual Funds

There are thousands of mutual funds. Popular categories include:

• Actively managed funds – A fund manager picks stocks to try to beat the market.
• Index mutual funds – Track a market index, similar to ETFs (e.g., VFIAX tracks the S&P 500).
• Target-date funds – Adjust risk level over time based on your retirement date.

Use fund research tools to compare:

• Performance history
• Fund manager tenure
• Expense ratio
• Holdings and risk profile

4. Submit Your Order

Unlike ETFs, you don’t trade mutual funds in real time. Orders are executed at the end-of-day NAV.

• Buy/sell orders are submitted during the day
• The transaction settles after the market closes

5. Monitor Performance

As with ETFs, periodically check how your mutual fund investments are performing. Be aware of fees, changes in fund management, or shifts in allocation strategy.

Key Differences: ETFs vs. Mutual Funds

Pros and Cons of ETFs

✅ Pros

• Low costs and fees
• Tax-efficient due to “in-kind” redemption process
• Trades like a stock
• No minimum investment beyond share price

❌ Cons

• Real-time trading may tempt you to time the market
• Less access to some active strategies
• Bid/ask spreads can impact price for thinly traded ETFs

Pros and Cons of Mutual Funds

✅ Pros

• Access to professional management
• Automatic reinvestment of dividends
• Great for dollar-cost averaging and long-term retirement accounts
• Target-date funds offer a “set it and forget it” option

❌ Cons

• Higher fees, especially with active funds
• Less tax efficient—capital gains are passed on to investors
• Trading restrictions and minimums
• Can’t trade during market hours

Which One Is Right for You?

It depends on your financial goals, investing style, and tax situation.

Choose ETFs If:

• You want low fees and real-time trading
• You’re comfortable managing your own portfolio
• You’re focused on tax efficiency
• You’re using a taxable brokerage account

Choose Mutual Funds If:

• You prefer a hands-off approach
• You’re investing through a 401(k) or IRA
• You’re okay with higher fees for active management
• You want to invest on a set schedule

Bonus: Can You Invest in Both?

Absolutely! Many investors blend both ETFs and mutual funds in their portfolios. For example:

• Use mutual funds in your 401(k) or IRA where trading flexibility isn’t needed
• Use ETFs in a taxable brokerage for better tax efficiency and lower costs

This diversified approach can give you the best of both worlds.

Final Thoughts

When comparing how to invest in ETFs vs. mutual funds, it’s not about which one is “better”—it’s about which one fits your investing strategy.

• ETFs offer flexibility, tax efficiency, and low cost
• Mutual funds offer professional management and simplicity

Ultimately, both are solid choices for building long-term wealth. The most important step is to start investing early, stay consistent, and choose investments aligned with your goals and risk tolerance.

If you’re just getting started, consider speaking with a financial advisor or using robo-advisory platforms that can help you choose between ETFs and mutual funds based on your needs.

Want to take control of your financial future? Open a brokerage account today and start building a diversified portfolio with ETFs, mutual funds—or both.