Just like their name suggests, exchange-traded funds—or ETFs—are basically funds that are traded on an exchange. They’re similar to mutual funds in lots of ways:
They pool money together from many investors to purchase investments for the fund.
They’re both managed by a group of financial professionals.
They come in a variety of different flavors (there are stock ETFs, bond ETFs and even ETFs that have a mix of both).
But there are some important differences between mutual funds and ETFs—the most obvious one being how they are bought and sold. You see, mutual funds can only be bought and sold at the end of the day after the market closes. That’s because the price of a mutual fund is set once a day. You can also set up automatic payments to buy more shares each month, which is a nice feature for long-term investors.
That’s not the case with ETFs, which are designed to be traded like stocks. That means the price of an ETF goes up and down throughout the day, and investors can buy or sell them in response to these short-term swings. Because of that, you don’t have the option to set up an automatic payment to buy shares of ETFs like you could with a mutual fund.