2025 ETF vs Mutual Fund Fees Comparison: Costs Explained and How to Save

Andy Smith, a Certified Financial Planner (CFP®) and seasoned financial expert with over 35 years of experience, specializes in personal finance, corporate finance, and real estate, helping thousands achieve their financial goals.

Investors in exchange-traded funds (ETFs) typically benefit from lower fees compared to mutual funds. In 2022, the average expense ratio for index ETFs stood at just 0.16%, while actively managed mutual funds averaged 0.66%. This fee gap has encouraged mutual fund providers to reduce their charges, making investing more affordable overall.

Key Insights

• Mutual funds have lowered fees to stay competitive with cost-efficient ETFs.
• ETFs generally have fewer fees, including no 12b-1 marketing fees and no load charges.
• The expense ratio reflects all management and operational costs expressed as a percentage of assets under management.

Understanding Mutual Fund Fees

Mutual funds disclose their expense ratios in prospectuses, which include management fees, 12b-1 marketing fees (capped at 1%), account maintenance fees, redemption penalties, exchange fees, and purchase fees.

• Management fees pay portfolio managers.
• 12b-1 fees cover marketing and sometimes employee bonuses.
• Account fees apply to low-balance accounts.
• Redemption fees discourage short-term trading.
• Exchange fees are charged for transfers between funds in the same family.
• Purchase fees are applied when buying fund shares.

Quick Fact

Load fees, paid to brokers for selling fund shares, are a one-time charge often around 5% but can reach up to 8.5%. Many no-load funds exist to help investors avoid this cost.

ETF Fee Structure

ETFs have lower administrative expenses because fees are deducted daily from the net asset value. Most ETFs are passively managed and have no load fees. Commission-free ETF trading is widely available through online brokers, and ETFs do not charge 12b-1 fees, which are typical for mutual funds.

Important Update

As of early 2024, the SEC approved 11 spot Bitcoin ETFs trading on NYSE Arca, Cboe BZX, and Nasdaq. By July 2024, spot Ether ETFs also began trading, expanding cryptocurrency investment options.

ETFs reduce costs through market-based trading where shares trade between investors without forcing the fund to buy or sell holdings, avoiding capital gains taxes and lowering expenses.

Active vs Passive Mutual Funds

Active funds employ managers who frequently trade to outperform benchmarks, while passive funds track indexes without discretionary trading.

Capital Gains Impact on Fees

Mutual funds must sell assets to meet redemptions, creating capital gains distributed to shareholders, increasing tax burdens and operating costs. ETFs avoid this by in-kind redemptions, exchanging shares for underlying assets without triggering sales.

In-Kind Redemption Explained

ETFs allow investors to redeem shares by swapping them for a basket of stocks matching the fund’s portfolio, reducing transaction costs and administrative work.

Final Thoughts

ETFs generally provide investors with lower fees and tax-efficient structures compared to mutual funds. Mutual fund companies are reducing fees to compete, but ETFs remain the cost-effective choice for most investors in 2024.

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