Exchange-traded funds (ETFs) are not mutual funds in the traditional sense; rather, they are hybrid instruments combining aspects of common stocks and mutual funds and offering many the benefits of both.
ETFs are products that trade like stocks. They mimic stock indexes and are passively managed just like an index fund. Because ETFs trade throughout the day just like a stock, investors have the ability to choose the timing and know the price of the transaction.
Trades can be placed through a broker at prevailing commissions and can be placed at the market price or with specifications such as limit or stop orders. All ETFs report market prices and some ETFs report NAVs, or net asset values. All total returns in Morningstar Office are calculated off the market prices.
For open-end and closed-end funds, Morningstar will only publish expense ratios from audited annual reports. Due to the relatively recent launch of so many ETFs, Morningstar will also report estimated expense ratios from ETF prospectuses.
Some believe that exchange-traded funds may be the next evolutionary step of the mutual fund itself because they trade on an intraday basis, have low expense ratios and are tax efficient.