Question

How do ETF’s work? What is the difference between an ETF and Closed and Open End Mutual Funds? If you are saving for your retirement does the choice have a big impact?

Answer 1

ETF (Exchange Traded Funds) invest in a variety of securities which is also in case of mutual funds. But, ETFs can be bought on a stock exchange which is not possible in case of mutual funds. Apart from the diversification, they also have lower expense ratios. We can buy them from a broker just like a stock. ETF managers invest in a variety of securities. They also have a NAV (Net Asset value) which trades on a stock exchange and can be bought or sold accordingly.

The main difference ETF and open ended funds is that ETFs are listed on the stock exchange while open ended funds are not. Also, the expense ratio is higher in case of open ended funds as compared to ETFs. This is mainy due to active management of funds by open ended funds.

The major difference between ETF and close ended funds can be drawn in case of NAV. Close ended funds are priced more or less than the NAV (which is basically premium or discount), whereas ETFs are closer to the NAVs'. The transparency is higher in case of ETFs as compared to Close ended funds.

For the last question, Yes, choice makes a big impact on the retirement. Let's consider ETFs. They charge lower fees as compared to mutual funds. This saving can make a huge impact since long term investor saves more by paying less fees. Mutual funds being actively managed charge a higher fee which ultimately cuts the investor profits. ETFs generally provide a lot of tax benefits. This is one more aspect of paying less.