How do ETFs differ from traditional mutual funds in terms of trading and cost?

• A. ETFs trade on an exchange like stocks; mutual funds are bought at end-of-day prices.
• B. ETFs have higher fees than mutual funds.
• C. Mutual funds trade intraday on an exchange.
• D. ETFs do not provide diversification.

Answer: (A)

ETFs are traded on an exchange just like stocks, so you can buy and sell them during market hours and see intraday price movements. The price you deal with is determined by the market with a bid-ask spread and any brokerage commissions, meaning you can react to price changes throughout the day. Traditional mutual funds, on the other hand, are bought or redeemed at the end of the trading day at the fund’s net asset value (NAV) calculated after the market closes. You don’t trade mutual funds intraday, and the price you pay or receive is the single daily NAV rather than a live market price.

In terms of cost, ETFs often have lower ongoing fees, particularly for passive funds, but you may incur trading costs such as a broker commission and the bid-ask spread when you buy or sell. Mutual funds may carry higher annual expense ratios and can include sales loads or redemption fees, and since you buy or sell at the end-of-day NAV, there’s no intraday trading cost in the form of a bid-ask spread.