(NewsNation) — Mutual funds and exchange-traded funds are types of investment vehicles available to investors. While they can be similar, there are some differences that you should know as you build your investment portfolio.

What is an ETF?

An exchange-traded fund, or ETF, gives investors the ability to buy and sell shares on a stock exchange. ETFs are either actively or passively managed. Passive ETFs are required to track a specific index, investing in a basket of securities that replicate the performance of the index the fund tracks, while an active ETF doesn’t have to track an index.

ETFs offer different advantages, like being tax efficient, being flexible since they can be bought and sold like common stocks throughout the day through a brokerage account, and they typically have lower fees than a mutual fund, along with intraday liquidity.

What is a mutual fund?

A mutual fund is an investment vehicle that splits funds from many individual investors to purchase a diversified portfolio of securities, like stocks and bonds, in alignment with the fund’s objectives. With a mutual fund, you can benefit from economies of scale while diversifying risk across a wide range of investment securities.

A fund manager oversees the portfolio and determines how the funds are separated across different sectors and businesses to meet objectives.

Mutual funds are increasingly popular investment options, with more than half of U.S. households owning shares in at least one mutual fund in 2023.

How are they similar?

Mutual funds and ETFs both invest in what’s called a “basket of securities” made up of stocks and bonds. They’re designed to meet specific objectives by investing in certain types of securities like U.S. stocks or the stocks of companies in other parts of the world.

They both come with professional management and give you diverse exposure to a particular segment of the market, so you don’t have to buy and sell hundreds of different securities on your own.

How are they different?

The difference between the two investment vehicles is how they are put together and traded. ETFs are more flexible, meaning they can be bought and sold during the day just like any security. Mutual funds are only priced and traded at the end of each trading day based on the fund’s net asset value.

They are managed differently. Most ETFs are passively managed, so they’re designed to automatically track a market index. Most mutual funds are actively managed with the goal of outperforming a market index.

Expense ratios for ETFs are usually lower than mutual funds due to their passive management. According to the Morningstar 2023 U.S. Fund Fee Study, the average fund cost for an actively managed fund was 1.01%, while passively managed funds were 0.55%.

Which one is right for you?

The type of investment that’s right for you depends on your separate investing goals and objectives.

If you want to minimize investing costs and capital gains taxes, an ETF may be right for you. They provide a more straightforward exposure to a market for investors who are cost-conscious and don’t worry about picking and choosing individual securities.

A mutual fund may be right for you if you want to invest a set amount of money at certain intervals, such as monthly. This strategy, known as dollar-cost averaging, is often used to build wealth over a long period of time to meet long-term objectives like saving for retirement.