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The major difference between ETFs and Mutual Fund is: Mutual Fund comes into existence with huge cash and a management team who will be taking care of investing those funds. So the traders send their part of investments and are in turn issued shares, then the fund managers figures out what should be added to their portfolio. In reality fund managers only thinks about where to invest and set a parameter on how much profit the fund is looking at and what the risk appetite for that particular script is. Now days once those decisions are taken the actual buying and the management of the scripts are being done by computer-driven systems. Computer driven systems have definitely made things easier for the fund managers but at times they adversely work for the market. It is believed that markets were going to crash with the global financial crisis but not at the level at which they actually crashed, one of the top reasons is computer driven systems automatically started heavy selling based on their triggers which helped the market fall further.

On the other side ETFs are completely opposite and comes into being with the stocks and not money. What I mean by this is Huge financial institutions already have invested billions of shares, so to create an ETF they strip off a part of their investment and gather a set of different stocks that fall under a particular category. Gathering a set of different stocks an index like fund is created which is being registered with a stock exchange and shares of that fund are being sold on the exchange. More shares of the fund can be added to the market if the financial institution decides to increase their investment in that set of different stocks.

Further, traders are choosing to invest in ETFs over Mutual Funds. Mutual Funds directly can be bought from Bank or Financial Institution with no sales charge or “load” but the management fees typically turns out to be high and on the other side you can buy or sell only at the closing price at the end of the trading session. ETF wins the competition if a trader is looking at ETF vs. Mutual Funds as the brokerage fees, expense ratio as well as taxes are lower with ETF and to top that ETF can be traded like a stock on the exchange.

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