Understanding the Difference
Both ETFs (Exchange-Traded Funds) and mutual funds allow you to invest in diversified portfolios. But they have key differences that matter for passive income investors.
ETF Advantages
- Lower expense ratios: Often 0.03-0.20% vs 0.5-1% for mutual funds
- Tax efficient: Fewer taxable events due to structure
- Trade like stocks: Buy/sell anytime during market hours
- No minimums: Buy as little as one share
- Transparency: Holdings disclosed daily
Mutual Fund Advantages
- Automatic investing: Easy to set up recurring purchases
- Fractional shares: Invest exact dollar amounts
- No commissions: When bought directly from fund company
- Simplicity: One price per day, no bid-ask spread
For Passive Income Investors
Consider these factors:
- Both can pay dividends for passive income
- ETFs generally more tax-efficient in taxable accounts
- Mutual funds may be better for automatic monthly investing
- Look at total costs, not just expense ratio
Our Recommendation
For most passive investors, low-cost index ETFs from providers like Vanguard, Fidelity, or Schwab offer the best combination of low fees, tax efficiency, and flexibility.