When They Trade
Open ended Mutual Funds usually trade only at the close of the market. You place your order sometime during the day before the fund’s cutoff time and your order is executed at the price the fund calculates at the market close of that day. If your order is placed after the cutoff, your order is executed at the close of the next market day. As with any generalization, there are exceptions. Some fund families allow execution of trading orders two or more times a day.
Exchange Traded Funds trade like stocks – your order can be executed anytime during the trading day. And, you can short ETFs, but not Mutual Funds.
Frequent Trading Restrictions
Mutual Funds usually have some trading frequency restrictions – extra fees are charged if you trade more often than the fund allows. Exchange Traded Funds have no such restrictions. You pay a fee to your broker each time you trade, but there is no excess trading penalty.
Managed – Unmanaged
Mutual Funds are split into the managed and indexed (unmanaged) varieties. Managed funds can invest in a broad range of trading vehicles limited only by what the fund rules allow. Index Mutual Funds use various techniques to attempt to match the returns of the underlying index the fund tracks.
Exchange Traded Funds are generally unmanaged in the sense that they track the return of an underlying index. Being unmanaged, ETF expense fees are generally lower than Mutual Fund fees.
Key Differences Between ETFs and Mutual Funds
The key differences for traders and market timers between Exchange Traded Funds and Mutual Funds are probably that Exchange Traded Funds can be traded anytime during the trading day using any stock broker.
Mutual Funds usually can only be traded at the close using the Net Asset Value (NAV) calculated by the fund company – and the order for the trade must be placed much earlier in the day, often as early as 10 AM.
Finally, even including brokerage commissions, Exchange Traded Funds will usually be a better value for traders because of their lower overall expenses.