A mutual fund pools money from many investors to buy securities under an investment strategy. It may track an index or be actively managed and charges fees for managing the portfolio. section 4.2
Mutual funds differ from exchange-traded funds (ETFs) in several practical ways:
- Trade only once per day, at the end of the day, directly with the fund provider rather than on an exchange. section 4.2.1
- Price transactions from the value of their holdings, so they do not trade at ETF-style premiums or discounts. section 4.2.1
- May charge management fees, 12b-1 fees, front-end or back-end sales loads, and minimum investment amounts. section 4.2.2
- Can pass realized portfolio capital gains through to taxable investors when securities are sold during rebalancing. section 4.2.3
A taxable rebalance
Suppose a fund must sell appreciated securities while rebalancing. A mutual fund passes the resulting capital gain to its holders, potentially creating taxes. An ETF may instead use a heartbeat trade to exchange securities without selling them. section 4.2.3
Table 4.2 Old and new index weights
| A | B | C | D | E | |
| Old weight | 50% | 30% | 20% | 0% | 0% |
| New weight | 0% | 45% | 30% | 15% | 10% |
Compare old and new index weights to see why portfolio rebalancing can create different tax outcomes for mutual funds and ETFs. section 4.2.3
