Question

(3) How do ETF’s work? What is the difference between an ETF and Closed and Open End Mutual Funds? If you are saving for your retirement does the choice have a big impact? (20 points)

Answer 1

ETFs stands for exchange traded funds, ETF trade similar to any other stocks and it replicates the performance of any other stocks. ETF consist of a basket of securities with reference to the index whose performance it is trying to replicate, so the underlying assets in an ETF are the stocks and securities similar to an Index and when an ETF is formed the depository participant buy and sell the securities so the value of an ETF is derived from the value of the underlying shares. The major difference between an ETF and a closed or open-ended mutual fund is that, ETF are formed to replicate the performance of the Index and the mutual funds are pooled asset from large number of investors. Closed end fund issue fixed number of shares and they trade on the exchange similar to any other stock whereas open ended fund is where fund manager issue new share directly to the investors. Yes, when you are saving for your retirement that does have impact as to what kind of fund you are going to invest in because people would like to see their retirement fund grow to meet the requirement. Majority of people who are not very familiar with the market, it is advised that they should choose to go ahead with investing in mutual funds because the expense ratio is low and the fund is managed by a professional so it does have certain edge but ETF over a 15 to 20 year can also give good returns but they do face lot of volatility also.