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This answer by base64 mentions:

Now you may ask why VTI is 0.03% while VTSAX 0.04%. That is because Vanguard of VTSAX provides service, while the service of VTI is provided by your broker.

I don't see what kind of services mutual funds (e.g., VTSAX) offer that equivalent ETFs (e.g., VTI) don't. Wouldn't shareholders call their brokers when purchasing/selling their mutual funds if they don't want to do it themselves online, just like for ETFs? Or do mutual funds offer some other kind of services that ETFs don't?

Note that the example I chose (VTSAX vs. VTI) compare an index-based mutual fund vs. its ETF equivalent, but I am generally in any mutual funds and their ETF equivalents, regardless of whether they are indexed-based or actively managed

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  • Aren't you asking "What kind of services do mutual funds offer that brokers of ETFs don't?" – base64 Jan 20 at 4:47
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    @base64 I don't know: Wouldn't shareholders call their brokers when purchasing/selling their mutual funds if they don't want to do it themselves online, just like for ETFs? – Franck Dernoncourt Jan 20 at 4:57
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    Are you confusing index funds with mutual funds by any chance? – user541686 Jan 20 at 11:08
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    @user541686 smartasset.com/financial-advisor/index-fund-vs-mutual-fund: "Index Fund [...] can be structured as a mutual fund or as an exchange-traded fund (ETF)". VTSAX is an index fund structured as a mutual fund. VTI is an index fund structured as an ETF. Is my understanding correct? The question is focusing on the difference between mutual funds and their equivalents ETFs, regardless of whether they are indexed-based or actively managed. – Franck Dernoncourt Jan 20 at 21:08
  • @FranckDernoncourt: Ahh I see, never mind then haha. I was just confused because the question you linked to wasn't actually talking specifically about mutual funds, but I think you've got it right. – user541686 Jan 21 at 0:07
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When you invest in a traditional (not exchange traded) mutual fund, you generally have an account with the mutual fund company directly. Your money goes straight to them, they send you statements, you log in directly to their website, etc. If you interact with a broker at all (not required), the broker is simply acting as a sales person for the mutual fund company, perhaps getting a sales commission from the mutual fund company.

With an ETF, you do not interact directly with the fund company at all. You are required to purchase shares through a broker, and your account, statements, and website access are all managed by the broker. The fund does not pay any sales commission to the broker; they get paid through any transaction fees they might charge the investor. (These days, there are often no transaction fees.)

Related: What are the important differences between mutual funds and Exchange Traded Funds (ETFs)?

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A major difference between a Mutual Fund and a corresponding ETF is the consequences of daily trading:

  • if you buy a mutual fund, the respective company, in your example Vanguard, needs to act accordingly and invest your money in the underlying stocks / securities. If you sell the Mutual Funds the next day, they again have to act and sell the underlying, to produce the necessary cash for you (of course, they would only do that with the accumulated changes from all buyers and sellers every day, but it is still a daily effort, and produces trading cost).
  • if you buy (or sell) an ETF, you find a partner for this trade on the exchange. Vanguard has nothing to do with the transaction, and doesn't need to act in any way. Only if the market demand started to deviate strongly from the supply over longer periods, they would have to 'create' (or 'dissolve') a large block of the ETFs, to balance the market.

This is the main reason ETFs have a cheaper cost than the otherwise identical Mutual Fund.

In addition, they often offer DRIP investment, which buys you fractional shares for your dividends, but that's probably a minor cost factor.

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  • Does a large mutual fund company like Vanguard actually have to buy & sell underlying securities in small amounts, e.g. for your individual trade? One would think they'd maintain a cash pool for small amounts incoming/outgoing, and trade in larger blocks when & if needed/ – jamesqf Jan 23 at 19:09
  • Yes, but the total of all daily transactions is still every some days enough so they need to trade. Otherwise, if the underlying stock goes up, they lose out. – Aganju Jan 23 at 20:41
  • Of course. And depending on the fund, they might trade because it seems advantageous, or because they need to rebalance things to track an index. My point is that it's not a matter of them having to sell stuff (especially tiny fractional shares of every stock in the fund) just because I want to take out a few thousand dollars. – jamesqf Jan 24 at 20:48
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ETFs and mutual funds have many similarities and various differences. There are different types of ETFs and different types of ETFs so the following is a general comparison of ETFs and open ended funds:

MUTUAL FUNDS

  • Actively managed
  • May have minimum holding periods and penalties for selling sooner
  • Usually bought or sold at the end of the day
  • Trading occurs between the investor and the fund
  • Actively managed
  • Higher fees and higher expense ratios
  • Higher minimum investment
  • No limit on the number of shares that can be issued
  • Share price (NAV) is based on value of assets held and calculated EOD
  • Cannot be sold short
  • Tax disadvantaged if shares must be sold to raise cash for redemptions

ETFs

  • No minimum holding period
  • Are more cost effective
  • Trade like stocks throughout the day (share price can differ from the NAV)
  • More likely to be passively managed (index ETFs) and therefore, lower expenses
  • No minimum investment required (some brokers offer fractional shares purchases)
  • Can be sold short
  • Passive management provides tax advantages "in-kind redemptions" does not incur taxable realized gains (creation and redemption)
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  • I think OP is asking specifically about index funds vs. their ETF equivalents. – Ben Miller - Remember Monica Jan 20 at 13:15
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    Based on the question and subsequent comments, it's not clear what the OP is asking. – Bob Baerker Jan 20 at 13:22
  • All we have to do is change the tags and the question will make perfect sense ;->) – Bob Baerker Jan 20 at 17:18
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    Ben's correct, index-based mutual funds vs. their ETF equivalents, or more generally mutual funds vs. their ETF equivalents, regardless of whether they are indexed-based or actively managed. – Franck Dernoncourt Jan 20 at 21:28
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    @FranckDernoncourt ! Ah, I was just making a joke - do you know the famous passage in the film Casablanca ! – Fattie Jan 20 at 22:58

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