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How do index funds and ETFs work?

Big Rig

Well-known member
May 6, 2009
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So I have got this right ?


1 ETFs are a basket of stocks held within the ETF that are traded on the market like any other stock so the traded value of the ETF may not match its intrinsic value . When I buy the ETF it is the same transaction as buying any stock

I think I got that right



2 An index fund is a basket of stocks held within the index fund but it is not traded on market .

Here is what I do not understand : When I put $100 into the index fund the fund has to purchase $100 of corresponding stocks at end of trading day? So, I cannot actually purchase or redeem an ETF until the end of the trading day ?


I had a broker tell me a index fund is actually a basket of ETFs packaged so that they can be sold by someone without a trading license, that does not sound right.



Cheers
 

yomero5

Well-known member
Jan 12, 2017
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An ETF may be an index fund, for example XIU. But an ETF may also be an actively-manged fund. Regardless, they are both traded like a stock.

An index fund (or an actively-managed fund) may or may not be an ETF. One that is not, cannot be redeemed or bought until the end of the trading day, or the next day.

An index fund is not a "basket of ETFs", it is a basket of stock that are passively-managed, or basically, hardly manged at all, that's why the management fees are so low. You don't need a trading license to buy ETFs, just a direct investing account.
 

Big Rig

Well-known member
May 6, 2009
1,913
64
48
An ETF may be an index fund, for example XIU. But an ETF may also be an actively-manged fund. Regardless, they are both traded like a stock.

An index fund (or an actively-managed fund) may or may not be an ETF. One that is not, cannot be redeemed or bought until the end of the trading day, or the next day.

An index fund is not a "basket of ETFs", it is a basket of stock that are passively-managed, or basically, hardly manged at all, that's why the management fees are so low. You don't need a trading license to buy ETFs, just a direct investing account.
If I purchase $1000 worth of the index fund they buy $1000 worth of stock? For that matter, how does a mutual handle new monies? Do they buy more stock with new monies? Just curious, does anyone know?
 
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