Economy

Last edited Fri Nov 24, 2023, 07:26 PM - Edit history (1)

intermediaries in some complicated process who seek to keep the price of the ETF from being too far from the Net Asset Value (NAV).

There is a myth that all ETF's are index funds and all mutual funds are active. False. Many ETFs are actively managed and don't follow an index. Likewise there are tons of mutual funds that follow an index.

Actually all funds are managed, e.g. an index fund of whatever variety tries to match the index it is following with a weighted selection of shares of SOME of the different companies that make up the index, and this process is ongoing.

When I use the term "actively managed" in the above I mean where the fund manager does their own selection of stocks with the goal of beating some benchmark on a risk-adjusted basis.

Example of one of many Vanguard funds that have both an ETF version and a mutual fund version:

Vanguard S&P 500 index fund:
ETF version: VOO
Mutual fund version: VFIAX

From a regular investor's standpoint, one buys and ETF just like a stock: during a trading day. It's a market between buyers and sellers. Buying or selling an ETF is just like buying and selling shares of a stock.

Whereas for mutual funds, one puts a request to buy X number of shares or D dollars worth of shares, and the fund company figures out the NAV for that after the next close and that's the price you get. (If you place your order after the close, you'll get the NEXT DAY's closing NAV)

Personally I prefer mutual funds because I hate the bid-ask spread of ETFs and having to place limit orders on ETFs to be on the safe side from a surprise move during the trading day. And I don't like having the price being different from the NAV, its just extra volatility to me when the premium or discount changes from one to the other or in magnitude.

Mutual funds always settle at the NAV after the close of the day's trading.

Speaking of index funds: Mutual index funds are perhaps slightly more expensive (a higher Expense Ratio, or ER) or they are the same as the corresponding ETF index funds.

There's a tax concern with mutual funds that are held in taxable accounts (not a factor if it's in some kind of IRA or 401k) -- they distribute capital gains distributions when they sell shares to meet redemptions or to get their portfolio to be back in balance. These are taxable. You get these taxable distributions even if you didn't sell any shares.

ETFs rarely have capital gains distributions because when they "sell" shares through some kind of trading mechanism with their intermediaries, so they actually swap shares or something like that rather than selling shares. Usually.

The personal finance and investing group is another resource to check out (though there is unfortunately some bad information there too sometimes). There is a former professional broker hosting the group who probably knows all the correct minutiae about all of this.

https://www.democraticunderground.com/?com=forum&id=1121

This is all off the top of my head and there are things I don't understand very well about ETFs.