Active ETF vs Mutual Fund: Similarities and Differences

The exchange-traded fund (ETF) structure shares certain similarities with mutual funds, but also important differences that investors need to understand, especially if you’re used to investing through mutual funds.

When the first mutual funds appeared on the scene in the 1920s and subsequently exploded in their numbers in the 1950s and 1960s, most investors utilized these funds to access actively-managed portfolios.

Investing in Active ETFs vs Mutual Funds: A Brief History

Active ETFs combine the potential benefits of active management traditionally offered through mutual funds with the lower cost and tax-efficiency of ETFs, popularized in recent years primarily through passive ETFs.

Active ETFs vs Mutual Funds: Similarities and Differences

Let’s take a further look at the primary distinguishing factors between actively-managed ETFs and active mutual funds.

1. Transparency Requirements

Most mutual funds in the US report their holdings to shareholders only on a quarterly basis. This means that in between reporting periods, investors with money in an active mutual fund have little idea about what their fund is holding. The quarterly reporting also makes style drift harder to detect for investors.

When any one investor decides to sell out of a mutual fund, the fund manager has to raise cash by selling some securities if he/she was fully invested previously. The sale of those securities can result in realized capital gains that get taxed and the tax bill is footed by all investors in the fund, even those who did not sell any shares.

2. Tax Efficiency

3. Intraday Pricing and Liquidity

One advantage of this mechanism is that investors can be assured that there shares will be transacted at the fund’s net asset value (NAV).

Most actively-managed ETFs have expense ratios that are lower than those on the average active mutual fund that provides investors with exposure to a similar strategy. 

4. Lower Expenses

5. No Investment Minimums or Sales Loads

Active ETFs have no minimum whatsoever, as long as you have enough money to purchase a single share of the fund on the market.

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