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Investing With Your IRA: ETFs vs. Mutual Funds

Byline profile imageEdited by Arturo Conde, CEPF®
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Byline profile imageReviewed by Brandon Renfro, CFP®, RICP, EA
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Investing for retirement requires careful planning and informed decision-making. An individual retirement account (IRA) is a powerful tool for retirement savings, offering tax advantages that can significantly enhance your future financial stability. IRAs allow individuals to direct pre-tax income, up to specific annual limits, toward investments like mutual funds and exchange-traded funds (ETFs), which can grow tax-deferred. Choosing the right investments for your IRA and diversifying this selection can have a notable impact. But you might not be able to choose on your own. If you’re uncertain, a financial advisor can help guide you in building a diversified portfolio for your specific needs.

ETFs vs. Mutual Funds

Exchange-traded funds (ETFs) and mutual funds are two of the most common investment vehicles used in IRAs. Mutual funds pool investor money into a professionally managed portfolio of securities, while ETFs are typically index-tracking funds that trade like stocks on an exchange. Both provide diversification, but they differ in how they are traded, managed, and taxed.

How They Trade

Mutual funds are bought or sold once per day, after the market closes, at the net asset value (NAV). ETFs, on the other hand, trade on an exchange throughout the day like individual stocks, with prices fluctuating based on supply and demand.

Costs and Fees

Some mutual funds charge front-end or back-end loads, while ETFs generally do not. ETF trades may incur brokerage commissions, though many platforms now offer commission-free trading. Both ETFs and mutual funds also charge ongoing management fees, known as expense ratios. ETFs typically have lower expense ratios, which can compound into meaningful savings over time.

Management Style

Many mutual funds are actively managed, meaning professional fund managers decide which securities to buy and sell. While this can be attractive for investors who prefer not to oversee their portfolios directly, the added management often comes with higher costs. ETFs, in contrast, tend to follow an index and operate passively. Because of this design, they generally carry lower expenses and deliver returns that closely mirror the performance of their benchmarks.

Tax Efficiency

Mutual funds may trigger taxable events when fund managers sell holdings, even if an investor does not sell their own shares. ETFs use an “in-kind” creation and redemption process that helps minimize capital gains distributions, making them generally more tax-efficient.

Transparency and Liquidity

Mutual funds disclose their holdings periodically, often quarterly, and shares can only be traded at the end of the trading day. ETFs disclose their holdings daily and can be bought or sold throughout market hours, giving investors greater transparency and flexibility.

Risk Considerations

Both ETFs and mutual funds carry risks, including market, sector and management risks. Investors should align their fund choices with personal risk tolerance and retirement goals. Diversification across asset classes can also help balance risk with potential returns.

Which Belongs in Your IRA?

Choosing between ETFs and mutual funds for an IRA often comes down to how an investor wants to balance control, cost and investment style. Those who value professional oversight and are comfortable paying for active decision-making may gravitate toward mutual funds. They can provide access to specialized strategies or niche markets that are harder to replicate with index-based products.

ETFs, on the other hand, may appeal to investors who prefer cost efficiency, daily trading flexibility and transparency. They can serve as building blocks for a diversified IRA portfolio, especially when the goal is to closely track market performance without incurring high management fees.

For many investors, combining both can be effective. Mutual funds can anchor a portfolio with long-term, actively managed positions, while ETFs can complement them with targeted exposures to sectors, asset classes or international markets. The blend allows investors to harness the strengths of each structure, tailoring an IRA to specific goals, risk tolerance, and time horizon.

Consider an investor in their 40s who wants broad exposure to U.S. stocks but also sees potential in emerging markets. They might use a low-cost S&P 500 ETF for core holdings while selecting an actively managed mutual fund specializing in emerging markets to capture growth opportunities that require expert oversight.

Alternatives to Mutual Funds and ETFs

An IRA custodian reviewing the available investing options with a client.

IRAs can hold various types of investments, not just ETFs and mutual funds. Other options like bonds, individual stocks, certificates of deposit (CDs) and real estate investment trusts (REITs) offer different risk and return profiles. Each has unique risks and limitations.

For example, investing in real estate or a CD is generally considered a safe investment. But you might not see the more rapid growth you could potentially get by investing in certain stocks.

While investors generally have the flexibility to choose investments for an IRA, there can be certain limitations and restrictions. For example, some IRA custodians or trustees may have specific policies or limitations on the types of investments allowed within their IRA accounts. Additionally, the range of investment options available within an IRA can depend on the offerings of the custodian or financial institution holding the account. So some IRAs may have a limited menu of investment choices.

Bottom Line

A financial advisor using data to help a client compare mutual fund and ETF investments for an IRA.

Mutual funds and ETFs have unique characteristics, and the choice between them for an IRA will depend specifically on your investment goals, preferences and the features of each investment vehicle. You should also keep in mind that both assets can vary in fees, performance and strategy. So make sure that you carefully consider the benefits and drawbacks of each before investing.

Tips for Retirement Investing

  • In order to invest for your retirement it’s important to know what your long-term financial goals are. If you’re not sure, a financial advisor can help you make those goals or help you make a retirement plan to get there. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • As you’re saving for retirement it could be really helpful to see what your portfolio growth might look like over time. SmartAsset’s free investment calculator can help you estimate how yours might grow.

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