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Exchange Traded Fund (ETF)

An exchange traded fund (“ETF”) is similar to a mutual fund, in that it is a pool of assets that issues shares to the public that represent a unit of ownership to those assets.

How are ETFs different from Mutual Funds?

  1. ETFs operate more like shares of stock – purchases and redemptions of ETFs are executed by buying and selling shares from/to other investors, while with mutual funds the transactions are directly with the fund.
  2. ETFs can be bought and sold throughout the day while mutual funds can only be purchased after trading has closed for the day.
  3. ETFs are bought and sold at whatever price a willing buyer and seller agree to, while mutual fund shares are always sold at their “net asset value”, reflecting the fair value of the assets held by the mutual fund.
  4. ETFs can be sold short, bought on the margin, and many ETFs are underlyings of exchange traded options.
  5. EFTs tend to focus more on passive indexed strategies, while mutual funds tend to be more actively managed by professional fund managers
These differences generally allow ETFs to be managed at a lower cost than an otherwise similar mutual fund, but must be purchased through a broker with the associated transaction cost.

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Glossary

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