ETF Vs. Mutual Fund



When constructing an investment portfolio, you'll probably include a variety of stocks and bonds among the securities you purchase. Because ETFs are traded on the exchange, there is always an ask price (buyers get this price) and a bid price (sellers get this price).

One fund could include tens, hundreds, or even thousands of individual stocks or bonds in a single fund. Exchange-traded funds (ETFs), index mutual funds and actively managed mutual funds can provide broad, diversified exposure to an asset class or region or a specific market niche, without having to buy scores of individual securities.

The fund will only buy the stocks that make up the index the fund will be tracking in the proportion they are represented in the index. A bond index or stock index is tracked by most ETFs. Mutual funds, however, can only be purchased or sold at the end of the trading day after the market closes and their price is based on Net Asset Value (NAV) - the value of fund assets minus liabilities divided by the number of shares.

Lower fees: Although index mutual funds typically carry higher expense ratios than ETFs, they are much cheaper than actively managed funds. Investment value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Daily holding disclosures make ETF investing more transparent.

An ETF or a mutual fund that attempts to beat the market—or, more specifically, to outperform the fund's benchmark. 48 49 The rebalancing problem is that the fund manager incurs trading losses because he needs exchange traded bonds to buy when the index goes up and sell when the index goes down in order to maintain a fixed leverage ratio.

There are, however, many no-load mutual funds that can be bought and sold with no broker commissions. However—all else being equal—the structural differences between the 2 products do give ETFs a cost advantage over mutual funds. The fast-paced growth of the AMETF area coupled with the substitutability between the two products and tax advantages of AMETFs has the capability to gain significant market share from AMMFs in the future.

Unlike mutual funds, however, ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value (NAV”) of the shares, that is, the value of the ETF's assets minus its liabilities divided by the number of shares outstanding.

A fund's investment strategy, as stated in its prospectus, determines the mix of securities the fund manager chooses to purchase and hold. Emerging market stocks or high-yield bonds are less efficient markets where deep research and a proven strategy can likely pay off.

You can invest broadly (for example, a total market fund ) or narrowly (for example, a high-dividend stock fund or a sector fund )—or anywhere in between. The price of the fund is not determined until end of business day , when net asset value (NAV) is determined.

ETFs are subject to market volatility. You can open a brokerage account and buy or sell an ETF whenever the markets are open,and prices fluctuate throughout the day. A mutual fund may not be a suitable investment. You are investing in a less efficient part of the market.

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