Choosing Between Look-Alike ETFs and Mutual Funds

Consider how you trade and the type of account you plan to use, among other factors.

- NELLIE S. HUANG

EXCHANGE-TRADED FUNDS CONTINUE to gain in popularity, but the divide between ETFs and mutual funds is becoming a little murky. In recent years, for instance, several fund companies, including T. Rowe Price and Fidelity, have launched actively managed ETFs that are modeled after their best actively managed mutual funds. ETF index strategies, meanwhile, have been around for decades. The oldest, SPDR S&P 500 Trust, known as SPY (for its symbol), is 30 years old and has $362 billion in assets-not far behind the biggest index mutual fund, Vanguard 500 Index, which holds $392 billion.

When faced with a choice between buying shares in an ETF and buying shares in a mutual fund that follows a similar strategy, which is the better option for you? "The choice isn't always black and white," says Charles Rotblut, a vice president and financial analyst at AAII, a nonprofit organization that helps individual investors. The answer may depend on several factors, including how you typically trade investments and in what type of account you plan to hold the asset, among other things. In certain cases, it may come down to a matter of personal preference.

Similar but not the same. ETFs and mutual funds have much in common.

"There are many more similarities than differences," says Molly Concannon, head of equity products at Vanguard. Both are easy to trade and offer diversified exposure to a swath of the market in one go. They both pool assets from shareholders and invest in diversified baskets of stocks, bonds or other assets. There are actively managed and index-based strategies in both ETF and mutual fund structures. And both ETFs and mutual funds charge an annual fee, known as an expense ratio.