What is an Exchange Traded Fund?

The year 1993 saw the cre­ation of Exchange Traded Funds, or ETFs. Unlike their older cousins, mutual funds, ETF prices fluc­tu­ate dur­ing the day just like stocks do, although in the­ory the price should remain close to the net asset value of the stocks con­tained in theETF. With mutual funds, all trades (buys and sells) dur­ing the day are set­tled at the clos­ing price of that mutual fund for that day.

Which are better?

Since ETFs came along, there has been a rag­ing debate: are ETFs bet­ter than mutual funds? There is no clear con­sen­sus. We do use both mutual funds and ETFs. Pro­po­nents of ETFs argue they can have tax advan­tages; for this rea­son, where ETFs are employed we gen­er­ally rec­om­mend plac­ing them in tax­able accounts. Some of our clients have a pref­er­ence for index funds pro­vided by Dimen­sional Fund Advi­sors (DFA), which only has mutual funds.

To read more about the pros and cons of ETFs, see these arti­cles and books:

The ETF vs. Open-End Index-Fund Shootout, William J. Bernstein

Richard Ferri on whether an investor should buy ETFs or mutual funds

ETFs Can Be Tax­ing (Mot­ley Fool)

The ETF Book: All You Need to Know About Exchange-Traded Funds

A Com­par­i­son of Mutual Funds and Exchange Traded Funds (ETFs): Twelve Fac­tors to Consider

Exchange Trade Funds Not for Every­one (FPA Jour­nal 7 – 2001)