What are the key differences between mutual funds and exchange-traded funds (ETFs)?

• A. Mutual funds are priced once daily at NAV; ETFs trade on exchanges with intraday pricing; cost structures and tax efficiencies differ.
• B. ETFs are priced once daily at NAV; mutual funds trade on exchanges with intraday pricing.
• C. Both have identical pricing and tax treatment.
• D. ETFs are priced once daily at NAV; mutual funds trade on exchanges intraday; cost structures and tax efficiencies differ.

Answer: (D)

The main idea is how they are priced and traded, plus how costs and taxes work for each.

Mutual funds are priced once daily at their net asset value (NAV). Investors buy or redeem shares at that end-of-day price, so there’s no real-time price movement for individual orders during the trading day.

ETFs trade on exchanges like stocks, so their prices change throughout the day with supply and demand. You can place market or limit orders and see intraday price movements, with a price that can differ from the fund’s NAV at any moment.

On costs and tax efficiency: ETFs typically have lower ongoing expense ratios and, because of the in-kind creation/redemption process, they tend to be more tax-efficient, causing fewer capital-gains distributions to shareholders. Mutual funds can have sales charges or loads and may distribute capital gains more frequently when the fund buys and sells securities, which can create taxable events for investors. You may also incur brokerage commissions and bid-ask spreads when trading ETFs, while mutual funds operate through the fund company without those intraday trading costs.

In short, ETFs offer intraday trading and often lower costs with greater tax efficiency, while mutual funds settle at a single end-of-day price and may carry different fee structures and tax implications.