ETF mutual funds are funds that are comprised of a variety of exchange traded funds, or ETFs. The can be diverse, containing ETFs from many asset classes, such as gold, large companies, financial, construction, and pharmaceutical assets. They can also be narrow-focused, containing ETFs from only one or a few asset classes. Since an ETF mutual fund is a mutual fund, it shares some similarities with the traditional mutual fund. Both types enable an investor to diversify the investment portfolio. Both types can be either open ended funds, which are funds that can issue additional stock when demand increases, or closed end funds, which are funds that continue to trade the shares that were issued in the initial public offering with no additional shares created. Both types can carry transaction fees that can be miniscule or substantial, depending on the brokerage that is selling the fund and the amount of the transaction. However, the nature of an ETF is the factor that creates the difference. An ETF mutual fund offers the investor many advantages that are fueling its popularity over a traditional mutual fund.
Mutual funds are comprised of various stocks grouped together in one package. The shares of these funds are sold on the exchanges at net asset value, or NAV, at the end of the trading day. The ETF mutual fund can be traded at any time throughout the trading day. A major selling point for these types of funds is that there is no minimum deposit required to purchase shares in the fund. Therefore, an investor with limited finances can purchase an ETF mutual fund when they were previously unable to purchase a traditional mutual fund. Since the ETF mutual funds are usually managed by computer, the management fees associated with mutual funds is negligible. The exchange traded funds that make up the ETF mutual fund are formed by assembling together millions of shares into a basket of stocks to represent the appropriate index. The basket is deposited with a holder and a number of creation units are received. Creation units are split into individual shares that are traded on the market. ETF mutual funds enjoy the trading flexibility of stocks, in that they can be short sold, have limit and stop-loss orders placed on them, and can risk mitigation through hedging.
An investor who lacks the knowledge or time to manage their portfolio would benefit from an ETF mutual fund because it is managed by a professional. The fund manager can ensure that the investor will enjoy the tax efficiency, capital appreciation, and income generation that that these funds would offer.