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Exchange Traded Funds and Index Mutual Funds Compared

As they become more widely known, exchange traded funds (ETFs) are growing in popularity with investors. ETFs offer investors the ability to invest in a large and growing number of market indexes or sectors. While ETFs and index mutual funds have many similarities, they also have a number of important differences.

Feature ETFs Index Mutual Funds
Intra-day trading: Yes No, orders placed during the day are executed at the close of trading
Diversification across a number of securities: Yes Yes
Tracks index or sector: Yes Yes
Buy on margin: Yes No
Sell short: Yes No
Expenses: Brokerage fees are incurred with each transaction, and there is a spread between bid and ask prices

May have any or all of the following:

  • management fees
  • 12b-1 fees
  • redemption fees
  • sales loads
Tax considerations: ETFs typically make fewer capital gains distributions Must distribute any capital gains and dividends annually to investors, which may create a taxable event
Redemptions: Must be sold through a broker Shares may be redeemed directly with fund company

Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.