Exchange traded funds are described as having a similar structure to traditional mutual funds. Both are baskets of stocks that provide investors diversification benefits, but this is where the similarity ends.
“Mutual fund orders can be made during the day, but the actual trade doesn’t occur until after the market closes. Investors buy and sell mutual funds through a variety of distribution channels, including directly through the fund company. ETFs are bought and sold just like stocks. ETFs are listed on stock exchanges. Purchases and sells are executed through a broker-dealer and the price of an ETF can change from second to second, just like any stock,” wrote Phoebe Venable, President and COE of CapWealth Advisors, LLC, for The Tennessean. [Mutual Fund Pros Invest in Index ETFs: Poll]
The basket-style diversification benefits of an ETF and a mutual fund are similar because both styles of funds allow investors access to a range of strategies, both international and domestic. The popularity of the ETF has led to the creation of funds that track every segment of the market, or the broad market, in one shot.
The Investment Company Factbook recorded there were 1,194 ETFs trading, with net assets at $1.3 trillion at the end of December 2012, reports Venable. According to ETFGI, $243 billion in new cash flowed into the ETF business last year, up from the $161 billion in new capital the previous year, reports Reuters . [ETF Investment Strategies Contribute to Their Popularity]
Mutual funds are not listed on exchanges and buying and selling transactions are only recorded at the end of a trading day, after market close. Holdings within the mutual fund are disclosed only at the end of the day, whereas ETFs provide full transparency at any time. The price of an ETF changes every minute, the same as a single stock, and can trade in real time. Day traders, hedge funds, institutional investors and retail investors all benefit from the flexibility that ETFs allow. [Advisors Continue to Contribute to ETF Industry Growth]
“I think the main difference is that with the mutual fund portfolio, you as the investor pretty much interact directly with the portfolio; that is, you buy and sell from the fund. It might be through an intermediary like a financial advisor, but ultimately the interaction is at the fund level.With an ETF, generally the interaction is on a brokerage or an exchange, and so it is another person buying and selling shares that occurs in terms of how investors interact,” Joel Dickson of Vanguard said in a Morningstar interview.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.