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Mutual funds, ETFs, and ETNs are popular investment vehicles, each with distinct structures, trading mechanisms, and tax treatments.
Mutual funds are ideal for investors who prefer active management and professional asset selection. ETFs cater to passive investors looking for low-cost exposure to specific markets or sectors. ETNs, though less common, involve additional credit risk due to their debt structure.
Structure and Management:
ETFs (Exchange-Traded Funds): ETFs are investment funds traded on stock exchanges, similar to individual stocks. They are designed to track the performance of a specific index, sector, commodity, or asset class. ETFs are passively managed, replicating the holdings of the underlying index.
ETNs (Exchange-Traded Notes): ETNs are unsecured debt securities issued by financial institutions. They aim to replicate the performance of an underlying index or asset. However, unlike ETFs, ETNs do not hold any assets. Instead, they are backed by the creditworthiness of the issuer, making them subject to the issuer's credit risk.
Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They can be actively managed, where fund managers make decisions about asset allocation, or passively managed, similar to ETFs.
Trading and Liquidity:
ETFs: ETFs are traded throughout the trading day on stock exchanges at market prices, which can fluctuate based on supply and demand. This intraday trading allows investors to buy and sell ETFs at any time during market hours.
ETNs: ETNs also trade on stock exchanges and can be bought and sold throughout the trading day. Their prices can fluctuate like ETFs, but their value primarily depends on the issuer’s creditworthiness.