Investing: A one page primer about exchange-traded funds
Until recently, the best way to put together a portfolio of stock and bond index funds was to buy index mutual funds. Mutual funds issue shares that are priced after the close of each trading day; the share price is determined by the closing prices of the stocks held by the fund. Investors can buy or sell these shares each day after the shares have priced, and in many cases do not have to pay transaction fees for buying and selling the shares if they hold an account with the mutual fund company. Mutual fund company Vanguard pioneered stock index funds, and offers some of the lowest-fee index mutual funds. Vanguard’s S&P 500 Index fund, for example, is the largest US index fund.
However, over the last year and a half new products have hit the market that have distinct advantages over index mutual funds. They are exchange-traded funds, or ETFs. Here's an explanation of ETFs in one page:
Exchange-traded funds are similar to index mutual funds. The key difference is that ETFs, instead of pricing once a day after the market closes, are traded throughout the day as if they were regular stocks. If you want to buy shares in an ETF, you buy them as you would buy a stock - namely from someone else who sells them to you on a stock exchange (thus the name “exchange traded funds
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