What is the difference between an ETF and a Mutual Fund?

The distinction between exchange-traded funds (ETFs) and mutual funds lies in their structure, trading methods, costs, management styles, and tax implications.

ETFs Mutual Funds
Trading
Traded throughout the day on an exchange with intraday price changes, akin to stocks. ETF prices can slightly differ from NAV. 		Bought and sold once a day at the day’s closing price (NAV) from the mutual fund company.
Fees May entail brokerage commissions, similar to stock trades. ETFs have explicit and implicit costs, including trading commissions, operating expense ratios, bid/ask spreads, and premium/discount to NAV. May involve transaction fees such as sales charges or redemption fees. Have explicit and implicit costs, including trading commissions, operating expense ratios, bid/ask spreads, and premium/discount to NAV.
Tax Implications Lower taxable capital gains distributions due to less frequent trading. Distribute fewer capital gains due to in-kind redemptions, making them more tax-efficient. More taxable capital gains distributions, potentially resulting in higher taxes. Higher capital gains distributions, leading to potentially higher taxes. Selling securities within a mutual fund may trigger capital gains for shareholders.
Transparency Disclose holdings daily, providing up-to-date transparency. Disclose holdings daily, providing up-to-date transparency. Normally disclose holdings quarterly, potentially providing less current information.
Liquidity and Trading Trade throughout the day on exchanges, enhancing liquidity. Supported by two markets: ETF trading on the exchange and primary market liquidity from underlying securities. Traded once a day after market closure. No bid-ask spreads, unlike some ETFs. Execute orders once per day after market close.
Cost Efficiency Generally have lower expense ratios than mutual funds. Tend to have higher average expense ratios than ETFs.
Management Often passive, pegged to index performance. Some are actively managed. Both active and indexed options, with active funds managed by fund managers.
Minimum Investment No minimum investment, can be bought as whole shares. Generally require a minimum investment amount, ranging from a few hundred to several thousand dollars.

In summary, both ETFs and mutual funds offer professional management and a wide variety of investment options, enabling diversification. However, their differences in trading methods, costs, transparency, and tax efficiency should guide your choice based on your investment preferences and goals. While ETFs provide advantages such as intraday trading, lower fees, and potential tax benefits, mutual funds offer options for both active and indexed management styles. It’s essential to understand these distinctions to make informed investment decisions.

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