Can anyone please help me understand the difference between an ETF (Exchange Traded Fund) and MF (Mutual Fund?

Question

I know what mutual funds are. How are exchange traded funds any different?

Answer 1

ETFs are like mutual funds, but ETF shares are traded on the stock exchange. Shares of mutual funds are not traded on the stock exchange. You must have a brokerage account to purchase ETF shares, like the online Scottrade or Ameritrade. Mutual fund shares can be purchased directly from the fund company as well as through a brokerage account. For both ETFs and mutual funds, the share price reflects the price of the individual stocks it holds. ETFs are "indexed" rather than actively managed: the stocks an ETF holds are selected to reflect a stock index like the S&P 500. ETFs are like index funds in terms of their stock holdings. If an ETF is "actively" managed, it's called a "closed-end fund" rather than an ETF.

Advantages of ETFs: the expense ratio is usually slightly smaller than the equivalent mutual fund. Also ETFs are available that target very specific market sectors, such as water resources (PHO offered by Powershares). ETFs are also more tax efficient, since they do not generally distribute as much income in the form of dividends and capital gains, but there is some debate as to the actual tax efficiency of ETFs. It may depend upon the particular ETF you choose.

Disadvantages: Every time you purchase or sell shares of an ETF you pay broker fees. If you purchase mutual fund shares directly from the mutual fund company, there are usually no fees for buying or selling.

Answer 2

ETF - Options are traded on ETFs not on MF. You can short sell ETF not MF. ETFs are traded on the amex and MF are purchased from the fund family. You do this through a broker typically, but they aren't traded on the open market. ETFs are transparent. You know what is held inside an ETF. You typically only have access to the top 10 holdings within a MF, unless you contact the company directly and ask for the holdings. They will probably be current as of the end of the most recent quarter. ETFs trade at their NAV, b/c of the options and short-sell feature, where as there can be a disconnect between a MF NAV and its underlying value. These are a few of the differences but not all.

Answer 3

Exchange Traded Funds don't actually purchase the stocks in their index. It's just a fund whose value is based on the index that it tracks.

If you buy an ETF that is tied to the DJIA, you don't actually own any of the stocks that make up the DJIA. Whereas, with a mutual fund, you actually DO own a piece of everything they invest in.