Shares of a basket of stocks, bonds, or other assets change hands on a public exchange throughout the trading day. Buyers and sellers set the price on each trade, rather than waiting for one calculation at the close.
Holdings in the Basket
The basket can follow a published index, focus on one sector or region, or reflect a mix chosen by the fund’s manager. One share is a claim on that whole mix, so the buyer holds a slice of many assets rather than a single company alone.
- Index baskets: The holdings copy a published list of stocks or bonds.
- Focused baskets: The mix is limited to a sector, a region, or one kind of asset.
- Managed baskets: A manager selects and changes the holdings instead of copying an index.
Pricing Through the Day
While the exchange is open, the share price can sit above or below the value of the holdings as orders arrive. A mutual fund is typically priced once at the end of the day, and purchases and sales use that single figure.
In the United States, the regulator of the public markets is the Securities and Exchange Commission (SEC).
Creation and Redemption
Large dealers create and redeem shares in blocks so the market price stays near the value of the holdings. When the exchange price is higher than that value, a dealer can give the fund a matching basket, or cash, and receive new shares to sell. When the exchange price is lower, the dealer can return shares and take the basket, or cash, back. Supply changes through the day, without waiting for an end-of-day price.
| Feature | Exchange-Traded Fund | Mutual Fund |
| Trading | Shares trade on an exchange while the market is open. | Investors buy from and sell back to the fund. |
| Pricing through the day | The market price updates with each trade. | The fund is typically priced once at the end of the day. |
| Share creation | Large dealers create and redeem shares in blocks. | The fund issues or cancels shares as investors come and go. |
