Because ETFs are traded on an exchange, they are subjects to brokerage fees. Mutual funds, on the contrary, when purchased from the original company, are not subject to any brokerage fees. Brokerage fees to purchase ETF shares can range from $11-20 or $3 from online discount brokerages.
When compared to mutual funds, ETFs have much lower expense ratios. Share-holder related expenses are much lower. They also hold an advantage not being required to invest cash contributions, fund cash redemptions nor maintain a cash reserve for redemptions. Their costs hover around 0.1% – 1% in comparison to mutual funds which charge 1% – 3%. As these costs compound they can become very significant in the long run. Mutual funds charge either a front or back end load and when compared to and ETF, which charges no load, an ETF holds a substantial advantage.
In the U.S., ETFs are structured in such a way that they are much more tax efficient than mutual funds. Anytime a mutual fund realizes any sort of gain not offset by a loss, it must distribute a capital gain to its members. Whether it’s to fund shareholder redemptions or for the purpose of reallocating investments, anytime a mutual fund sells portfolio securities they must distribute the capital gain to its members. If members decide to invest the gains back into shares of the very same fund they are still legally obligated to pay capital gains tax.
ETFs do the exact opposite. Instead of being redeemed by its shareholders, its shares are sold just as any other stock, on the stock market. Its investors only really realize a capital gain when a share of stock is sold or the trade reflects a change in the original index. Typically, they are known to be much more tax efficient than mutual funds.
In the U.K., ETFs have even better capital gains benefits. They can be protected from capital gains by placing them in an individual savings account or a self invested pension as they would other shares.
One of the greatest benefits and advantages of ETFs are the way they are treated like an ordinary share of stock. All the features of a regular stock also apply such as: short selling, limit orders, stop-loss orders, buying on margin, options (puts and calls) can be written against them, and trades can be made as with any other stock. Mutual funds do not premiums (the proceeds of a call sale or write) on calls written against them. Mutual funds do not offer those characteristics.
Mutual funds only allow for the purchase or sell at the end of the day at that particular mutual fund’s closing price. This makes stop-loss orders non beneficial, besides, not all brokers will even allow them. The stock-like liquidity of an ETF, because it is continually priced throughout the day, makes it possible for investors to make trades during regular trading hours.
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