What is the difference between exchange-traded funds and mutual funds?

Mutual Funds
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September 2016
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Hi! Thanks for writing! The answer provided by Investopedia here is great. I'd like to add a few more thoughts. 

ETFs are a type of exchange-traded investment product that offer investors a way to pool their money in a fund. This fund makes investments in stocks, bonds, or other assets and, in return, receive an interest in that investment pool. Unlike mutual funds, however, ETF shares are traded on a national stock exchange. ETFs are not the same thing as mutual funds. Generally, ETFs combine features of a mutual fund, which can be purchased or redeemed at the end of each trading day at its net asset value per share with the intraday trading feature of a closed-end fund, whose shares trade throughout the trading day at market prices. To put the difference between mutual funds and ETFs in perspective, imagine a day like Black Monday, October 19, 1987 when the stock market dropped 22.6%. If you had owned ETFs (which were actually not sold in 1987), you could have sold your ETF shares at any time during the day for their value at the moment, which was higher as the market was falling than it was when the day ended 22% lower. Had you owned a mutual fund and sold during the day, the brokerage would have taken your order when you said sell, but the sell price would have been calculated at the end of the day based on the net asset value, which in a 22% drop, would have been very low. The ability to sell the ETF immediately for its price right then as opposed to getting the end-of-the-day value for the mutual fund could save money in the event of a rare market crash.

Mutual funds are still the cornerstone investment of many retirement plans, but ETFs have been gaining in popularity in the past few years. Which is a better choice for your investment portfolio? If you are a long-term, buy-and-hold investor with little interest in trading, you are probably fine with highly rated, no-load mutual funds held by a reputable fund manager since the ability to trade often and quickly is not a characteristic that is important to you. If you prefer to buy and sell more frequently, ETFs offer greater tradability, lower costs, diversification, and transparency and therefore may work better for your objectives.

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October 2008
October 2016