The stereotypical process of buying a mutual fund involves a relatively complicated procedure. First, you talk to your financial advisor about your goals. Then you listen to them recommend a fund that fits into some type of investment strategy (highest commission structure, maybe?). Finally, you go off and live your life, while they launch the mysterious process (and byzantine paperwork) necessary to buy into the fund. (Or you just go to a website and fill out a form and wire in the dough; hello, Schwab.)
Exchange traded mutual funds streamline the process. They provide the ability to buy a mutual fund on an open exchange, much like buying an individual stock. They essentially form a subset of Exchange Traded Funds, or ETFs. The goal is to buy into a basket of stocks (or other assets) with one investment vehicle.
Using exchange traded mutual funds provides efficient diversification. Plus, the mutual fund aspect gives you access to some of the benefits of actively managed funds, rather than the index-based funds that populate much of the rest of the ETF space. In theory, professionals running your money should be better than just an index of a given set of stocks, but in practice, that no longer happens. (It did regularly in the 70s and 80s when pro fund managers regularly beat the market.) Today, with taxes and so many competitors, "deals" are relatively easy to spot, and most fund managers lag index funds over 5-10 year periods of time. With taxes, it's even worse, as fund managers sell, realize gains, get taxed, and add even more friction to the process.
See: Net Asset Value. See: Mutual Fund.
Related or Semi-related Video
Finance: What Are ETFs?275 Views
Finance allah shmoop shmoop what are efs Well first this
is the random financial terms you want to be asked
in the financial term spelling bee and second you should
know that e t f stands for exchange traded fund
f's are kissing cousins of index funds with one key
subtle but important difference f don't change at least generally
speaking an index fund might reflect the transportation industry and
have so much exposure to ford gm united airlines tesla
etcetera But it's required tohave say sixty five percent of
its exposure to companies based in the united states in
its charter every month that index fund has to re
balanced that exposure So if the auto companies do very
poorly in a given month index fund has to re
balance by buying mohr shares of those auto companies to
make up the difference you know given that they've performed
poorly relative toa airlines trucking company's railroads jeff howard segways
and so on But in a t f the fund
is basically set once and the shares just really kind
of float if over a decade the auto companies do
really well then in an e t f the auto
companies will just have a dominant influence on the overall
performance of the fund The management company doesn't have to
buy and sell shares regularly in an e t f
till fulfill the legal promises it agreed to at the
outset of the fund in the way in index fund
re balances its shares by buying and selling them So
what does that mean to you Well it means that
fc may drift in given directions like this guy For
example a generic technology e t f might have had
a total exposure of say five percent to internet stocks
in the beginning of nineteen ninety seven but amazon ebay
yahoo netflix and a well performed massively better than the
broader technology market which did well but just not omg
dot com well so that five percent waiting twenty years
later might be more like fifty percent or mohr of
that particular e t f but one other key aspect
of it is that it's traded like a stock i
e in one block and trade throughout the day there's
a bid and an ask price The bids are all
added up and shares in the fund can be bought
And sold at any time throughout the day Although the
market sets the price of an f just like it
does on a stock Well there now you're all ready
for the financial term spelling bee And they might also
ask you to spell lipo Yeah you might want to 00:02:33.69 --> [endTime] write that one on your arm
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