ETF vs mutual fund — which is better?
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ETF vs mutual fund — which is better?

29 Jun
2 May
5 min read

From menu items to dating partners to investment options, we think that the more choices we have the better. The truth is, too many choices often lead to decision paralysis.

Asset manager giant Vanguard, for example, offers 75 U.S. listed ETFs but at the same time over 160 mutual funds as well — and oftentimes they could be the same strategy, the only difference being one is in a fund format vs an ETF format. 

ETFs may not be passive index funds while mutual funds can be passive index funds

So what is the difference between an ETF and a mutual fund (also called unit trust). Many might assume ETFs are mainly passive, with the aim mainly to track the performance of an index, while mutual funds are actively managed by fund managers. 

But adding to the permutation of possibilities, there is now the emergence of a whole suite of actively managed ETFs. In fact, close to 1/3 of all ETFs are now active ETFs, with a total AUM of close to US$400bn.

On the other hand, there are also mutual funds such as the Hang Seng Index Fund and the HSBC US Equity Index Fund, which are passive index mutual funds that track the performance of the Hang Seng Index and the S&P 500 respectively.

Similarities and differences of ETFs and mutual funds

Both ETFs and mutual funds pool investors' money, which becomes part of a fund that invests in different assets. Both can be great tools to help you build a diversified portfolio with just a single investment, but there are important differences between them that you should understand before you decide which investment is right for you.

1. Pricing and trading of ETFs and mutual funds

ETFs are priced and traded on stock exchanges throughout the day, just like stocks, hence the name exchange-traded fund. You can set price limits or market orders when you trade ETFs. Depending on the liquidity of the ETF, the bid/ask spread can be narrow or very wide. For example, you can invest in the Hang Seng Index via the Tracker Fund of Hong Kong (2800.HK) through a brokerage during Hong Kong stock exchange hours, and as it is the most highly traded ETF on the exchange, its bid/ask spread is narrow.

On the other hand, mutual funds are invested or redeemed directly with the fund management company via a bank or broker. The price (or more commonly referred to as NAV) is set once a day, and everyone who puts in their order before a set time each day will have the same day-end NAV.

For a long-term investor, with investment horizons in months and years and not minutes, the intraday liquidity of ETFs is of little importance. Trading at NAV versus unsuccessfully trying to time the market and potentially paying more than what the underlying assets of the ETF are worth is not only comforting, but also less time consuming.

2. Cost of investing in ETFs and mutual funds

Depending on your broker, you may have to pay a brokerage fee to trade ETFs, this could range from a few dollars to over 0.50% on your investment amount. Although there are an increasing number of “zero-fee” online brokers emerging in the market.

For mutual funds, depending on your distribution channel, fees can vary widely. The lack of transparency has given mutual funds a deservedly bad reputation. You need to read the fine print and ask your broker or fund platform exactly what fees are involved: there could be an upfront subscription fee, and potentially platform fees, brokerage fees, switch fees, and redemption fees.
Worst of the lot is hidden trailer fees embedded into the fund, which are essentially sales commissions paid on a recurring basis by the fund manager to the distributor (Read more: Unit trust investing in Hong Kong: The pains of trailer fees). These fees can take a massive bite out of your returns so you should not blindly accept them.

Mutual fund fees can be as competitive as ETFs, once trailer fees are eliminated

We at Endowus are greatly opposed to these complicated layers of fees and misaligned incentives, which is why we prefer to charge a transparent and low all-in access fee (no additional subscription fee, brokerage fee, rebalancing, or wrap fees) and we never take kickbacks from fund managers or anyone else for that matter.

Though the expense ratios of ETFs are generally lower than mutual funds, this isn't always the case. With our 100% cashback on trailer fee commissions or by helping clients access low-cost institutional share class of funds, you’d be surprised to find that mutual funds can at times be as competitive as ETFs, if not even cheaper.

For example, the CSOP Hang Seng TECH Index ETF (3033.HK) is one of the most popular technology ETF traded by retail investors in Hong Kong. The ongoing charge of this ETF is 1.06% per year. If you are looking for broader emerging market technology exposure, the Value Partners EMQQ Markets Internet & ECommerce ETF (3030.HK) has an ongoing charge of 1.49% per year.

On Endowus Fund Smart, you can access global technology funds managed by the top-tier managers, such as Blackrock, Fidelity and Franklin Templeton. Below are three technology funds available on Endowus, and their fund-level fees after trailer fee rebate from Endowus range from 0.99% to 1.05%.

You might find this to come as a surprise, indeed, once trailer fee commissions are eliminated and unbundled, mutual fund or unit trust costs can be as competitive as ETFs.

Tax considerations on US-listed ETFs

Although US-listed ETFs often have low expense ratios, one should be aware of the potential tax implications for non-US persons like most of us..

As a Hong Kong-based investor, in the absence of a tax treaty with the US, there will be a 30% dividend withholding tax levied on dividend income from US-listed ETFs. 

Assuming an ETF has a low expense ratio of 0.15%, but has a 2.5% dividend yield. Taking consideration into dividend withholding tax, the total cost has now become more than 0.85% per annum.

Also relatively unknown is in the unfortunate event when a US ETF holder passes away, these US listed assets will be subject to a draconian US estate tax rate of up to 40%.

Read more: An Inconvenient truth: Taxes on US-listed ETFs


Admittedly, whether it’s choosing the right ETF or mutual fund , it can be difficult and time-consuming for many. 

At Endowus, instead of stock or fund picking, we believe the right way to build your portfolio is to take a more holistic view and first determine your investment goal — it can be investing for long-term retirement, short-term liquidity cash management or expression of a certain short-term sectoral view. For each of your specific investment goals, you can then determine the appropriate risk tolerance and asset allocation, then select the suitable investments as a way to express that view. 

We're agnostic between using ETFs and mutual funds to build our portfolios. Rather, we believe in taking an evidence-based approach to finding the best instruments at the lowest cost to maximise your chance of investment success.  

Click here to get started with your Endowus investment journey today and get access to our Best-In-Class funds and portfolio solutions at low, fair cost.


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Investment involves risk. Past performance is not an indicator nor a guarantee of future performance or returns. Projected performance or returns is not guaranteed to materialise. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 

Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

General risk warnings relating to collective investment schemes 

Before making an investment decision, you are reminded to refer to the relevant prospectus/ offering document for specific risk considerations and related fees and charges.

Funds are not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested.  

Some of the funds also involve derivatives. Do not invest in them unless you fully understand and are willing to assume the risks associated with them.


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