ETFs and index mutual funds tend to be generally more tax-efficient than actively managed funds. And in general, ETFs tend to be more tax-efficient than index mutual funds. While actively managed funds may outperform ETFs in the short term, long-term results tell a different story. Between higher spending rates and the improbability of outperforming the market over and over again, actively managed mutual funds tend to have lower returns compared to long-term ETFs.
Both mutual funds and ETFs are considered low-risk investments compared to carefully selected stocks and bonds. Both ETFs and mutual funds pool investors' money into a collection of securities, exposing investors to many different securities without having to buy or manage them. This may be important if the ETF is held in a taxable account and not in a tax-advantaged retirement account, such as an IRA or 401 (k). The main difference between ETFs and mutual funds is that the price of an ETF is based on the market price and is only sold in full stocks.
You can buy mutual funds and ETFs through a bank, investment firm, fund manager, brokerage account, or any other company that buys and sells them. With that in mind, many young investors will hear about exchange-traded funds (ETFs) and mutual funds and will wonder which one might be the best.