What distinguishes exchange-traded funds (ETFs) from mutual funds?

The distinction between exchange-traded funds (ETFs) and mutual funds lies primarily in how they are traded. ETFs trade on exchanges like regular stocks, allowing investors the flexibility to buy and sell them throughout the trading day at market prices, similar to individual stocks. This real-time trading capability is a key feature that sets ETFs apart from mutual funds, which are priced at the end of the trading day based on their net asset value (NAV) and can only be purchased or redeemed at that time.

The ability to trade ETFs throughout the day provides advantages such as implementing real-time strategies, taking advantage of price changes, and providing liquidity. This flexibility is particularly beneficial for investors seeking to respond quickly to market conditions.

In contrast, other options present characteristics that do not accurately depict ETFs. For example, ETFs are not limited to banks for purchase; they can be obtained from various brokerage firms. Additionally, ETFs generally have lower management expenses compared to mutual funds, influenced by factors such as passive management styles in many cases. Lastly, the idea that ETFs cannot be bought during trading hours is incorrect, as this contrasts with their primary market feature, which allows for continuous trading throughout the day.