What is the difference between an ETF and a mutual fund?
Short answer
Both pool money from many investors into a basket of securities. An ETF trades on an exchange throughout the day at a market price, while a mutual fund is bought and redeemed at its net asset value, normally once a day.
What they share
Both are pooled investment vehicles. Money from many investors is combined and managed according to a stated objective, giving each investor a share of a diversified portfolio. Both charge an annual fee, the expense ratio, taken from the fund’s assets. Both can be actively managed or follow an index (passive).
How they are bought and priced
An exchange-traded fund (ETF) is listed on a stock exchange and bought or sold through a broker at the prevailing market price, like a share. Its price can sit slightly above or below the net asset value (NAV) of its holdings. Large institutions called authorised participants create and redeem ETF units, which helps keep the price close to NAV.
An open-end mutual fund is bought from, and redeemed with, the fund company at the NAV calculated after markets close. Orders placed during the day get that day’s NAV (or the next one, depending on cut-off times). Many mutual funds also allow regular plans such as SIPs.
NAV per unit = (value of assets - liabilities) / units outstandingOther differences to check
ETFs need a brokerage account and may involve brokerage charges and bid-ask spreads. Mutual funds may charge entry or exit loads depending on the country and share class. Minimum investment, tax treatment and available products differ across markets. Read the fund’s factsheet and offer document for its costs, holdings and risks.