Exchange traded funds (ETFs), like mutual funds, pool the assets of many investors into a single fund for better efficiency and lower costs. Typically, these funds hold over 100 or even up to 3000 different securities.
Unlike mutual funds, exchange traded funds (as the name implies) are listed on the stock exchange. This means you can buy and sell them in any brokerage account at any time during the day. On the other hand, mutual funds are priced at the end of the day and you buy and sell at that fixed price (also referred to as net asset value or NAV price). Of course, being able to trade an ETF every minute of the day isn’t that important for most investors, but is simply a function of being listed on the exchange.
Two of the biggest differences between ETFs and mutual funds are:
- ETFs have lower operating expenses than actively managed mutual funds
- They have no investment minimums or sales fees.