At first glance, an ETF looks just like an index mutual fund. This is mainly because both invest in an underlying market index. Look again and you’ll see they both have unique characteristics that make them each valuable to different types of investors.
A mutual fund can be bought or sold only at the end of the day at its NAV. With ETFs however, investors get the benefit of real-time pricing as ETF shares can be traded just like stocks, intraday, through an Authorized Participant.
A mutual fund is bought or sold at the net asset value (NAV) generated at the end of the day. The price of an ETF fluctuates through the day allowing an investor the opportunity to time their purchase/sale for maximum value.
A mutual fund may be actively or passively managed, whereas ETFs are mostly passively managed. As there is no active management for ETFs, they work out more cost-efficient to an investor.
In short, ETFs combine the diversification of mutual funds with the liquidity and trading advantages of stocks, offering investors what could very well be the best of both worlds.
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