Mutual Funds and ETFs

While only 21% of American families have direct ownership of individual stock, 58% have some exposure to the stock market, according to the Federal Reserve’s 2023 Survey of Consumer Finances. 

Most of this additional participation in the stock market is through pooled investment funds such as mutual funds and exchange-traded funds, or ETFs, often through a retirement plan.  

A pooled fund invests money from a lot of different people into stock from a wide range of companies. Both mutual funds and ETFs are pooled investments that can also include bonds and other asset types.  

By diversifying holdings into dozens, if not hundreds, of stocks, bonds, and other assets, mutual funds and ETFs reduce volatility and risk. The trade-off is the individual investor does not directly control what the fund invests in – nor can the investor vote on shareholder resolutions or board of director elections for these companies.  

Many mutual funds and ETFs invest according to a set of principles. Find out how to evaluate mutual funds and ETFs on the Green America website.

What’s the difference?  

The main difference between mutual funds and ETFs is how they are traded.   

• Mutual funds can only be purchased at the end of each trading day based on the net asset value from the closing market price of all assets in the fund.   

• ETFs can be traded throughout the trading day, similarly to individual stock. 

Mutual funds have a long track record – the first U.S. mutual fund from Massachusetts Investors Trust launched in 1924. ETFs are much younger. The first ETF was the SPDR S&P 500 ETF Trust in 1993.  

Mutual funds tend to be actively managed by a professional who makes investment decisions – and charges a fee for the service. ETFs are often passively managed index funds with much lower fees. However, recent years have seen more passively managed mutual funds and actively managed ETFs.  

According to the Investment Company Institute’s 2023 Fact Book, 125 million Americans owned 8,763 mutual funds worth a total of $22.1 trillion and 2,989 ETFs worth $6.5 trillion – accounting for 48% of the world’s regulated funds.   

Index funds 

An index fund is a special type of mutual fund or ETF that mirrors the performance of a specific market index. Examples include: 

• S&P 500, short for Standard and Poor’s 500, which tracks 500 of the largest companies listed on stock exchanges in the United States 

• Russell 2000, which tracks the smallest 2,000 stocks in the Russell index, maintained by the London Stock Exchange 

• Wilshire 5000, a market-capitalization weighted index that tracks all American stocks traded in the United States. 

Index funds can be either mutual funds or ETFs. They are considered passive investing because they automatically rise and fall in line with whatever market they track.  

Because index funds are not actively managed – with a financial professional constantly deciding which stocks to buy and sell -- they are low-cost. The trade-off is that they contain every stock in the index, whether you want to invest in that company or not.  

Index funds surge — but raise concerns

For many years index funds were considered a poor way to invest. However, in recent years they have become much more popular. Over the last five years, investors put $3 trillion into index funds but withdrew $1.4 trillion from active funds.  

In 2024, total assets in passive mutual funds and ETFs surpassed those in active funds for the first time. Index funds now capture 53% of the market. The six largest mutual funds are now index funds.  

Index funds have surged in popularity not just because they are lower cost, but because they often outperform actively managed funds. According to the S&P Indices Versus Active (SPIVA) scorecard, only 15.29% of actively managed large-cap funds outperformed the S&P 500 over the last 10 years. In any given year, an average of 64% actively managed large-cap mutual funds and ETFs perform worse than the S&P 500.  

However, concerns are being raised about the concentration of index funds in the hands of a few large asset managers. Currently, index funds make up over 75% of assets under management by the three largest managers, BlackRock, Vanguard, and State Street.  

For index funds, as for most mutual funds and ETFs, it is the asset manager, not the individual investor, who votes on shareholder resolutions and board of directors elections at company annual meetings. This gives the three largest asset managers a disproportionate say in who is running these companies and how they are run. 

It is an issue that investors and policymakers will need to address as the market continues to evolve. 

Learn more about mutual funds and ETFs and how to evaluate them on the Green America website.