What distinguishes an exchange-traded fund (ETF) from traditional mutual funds?

An exchange-traded fund (ETF) is distinguished from traditional mutual funds primarily by the fact that ETFs trade on stock exchanges just like individual stocks. This allows investors to buy and sell shares of an ETF throughout the trading day at market prices, which can fluctuate based on supply and demand. This feature provides liquidity and flexibility that is not available with traditional mutual funds, which only trade at the end of the trading day at the net asset value (NAV) price.

Additionally, the structure of ETFs typically allows for lower expense ratios and tax efficiency compared to mutual funds, as they usually have lower management fees and fewer taxable events due to their unique creation and redemption process.

In contrast, traditional mutual funds do not operate on a stock exchange and are bought and sold at the end of the trading day. This fundamental difference is a key characteristic that defines how investors interact with these two types of investment vehicles.