The difference in liquidity between a mutal fund and an ETF is two days. Mutual fund liquidations settle next day (funds are avaiable), ETF sale proceeds are avaiable the third day after the trade occurs.
Major reasons to invest in ETF's versus mutual funds are the lower costs of administration for an ETF, and you know what you own with an index ETF versus a mutal fund that ony tells you that 4 times a year. There are ETF's that trade their portfolios. For the sake of this answer, I'm talking about index ETF's which comprise the bulk of the ETF marketplace. An additional plus for ETF's is they remain fully invested at all times. In markets like the one we're currently experiencing, mutual fund managers must keep cash on hand or raise cash to meet redemption instructions from clients. After the "Crash of 1987" (from Dow 2100 to Dow 1700). a noted mutual fund manager observed the worst part of the crash for him was not having money to buy bargains he saw as the funds were all going out through redemptions. Any cash that is not invested in equities cannot particpate in any subsequent market rallies.
An additional factor to consider in your decision is, if your mutal fund manager must sell stock to meet withdrawals, he/she may be forced to realize tax losses which you as a shareholder may not want or need. ETF managers don't have that problem either. With an ETF, in any market, you control your tax destiny.
Sometime when you have insomnia, read a mutual funds prospectus. You may find trading strategies that the fund can pursue with your fund dollar you didn't know existed. Such things as hypothcation, futures, loaning stock and other strategies an ETF can't engage in. To my mind, that may give the ETF a small margin of safety over an open end mutual fund. Perhaps not a major factor in a purchase decision, but I personally and for my clients, want to know specifically how their/my money is being invested.
Hope this helps you make some intelligent investment decisions.
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