What are the structural differences between ETFs and mutual funds?
While ETFs are registered with the Securities and Exchange Commission as investment companies – either as an open-end fund or a unit investment trust – they differ from traditional mutual funds both in how their shares are issued and redeemed and in how their shares or units are traded. Unlike traditional mutual funds or unit investment trusts, ETF shares are created by an institutional investor depositing a specified block of securities. In return for this deposit, the institutional investor receives a fixed amount of ETF shares, some or all of which may then be sold on a stock exchange. The institutional investor may obtain its deposited securities by redeeming the same number of ETF shares it received from the ETF. Retail investors can buy and sell the ETF shares once they are listed on an exchange.
