Exchange traded funds are funds which try to include all the benefits of both traditional mutual funds and traditional investment companies whilst avoiding some of the weaknesses. Traditional mutual funds or unit trusts are open-ended which means they can grow as big as they like as more investors wish to put their money into the fund, but can also reduce in size and cancel shares as investors take their money out of the fund. However, investors need to trade directly with the fund in terms of investing money and liquidating those investments and can only trade at one point per day. This is to allow the fund manager to know how much money they have at their disposal for a certain amount of time, and removes the need for them to hold cash to be able to meet any liquidations and also avoid them having to invest new money if it were allowed in at any point throughout the day. The downside of this, though, is that you cannot use mutual funds to take advantage of short-term movements in market conditions. Investment companies or investment trust companies are like any other company listed on an exchange with a fairly fixed amount of share capital or shares in issue. It is possible to increase or decrease that size, but not on a daily basis, as is the case with a mutual fund. The benefit of investment companies is that they have a market traded price, which does react to short-term movements in market conditions. However, the price of those shares may be different from the value of the underlying assets held within the investment company, which can also be referred to as the net asset value, or the NAV, as a result of demand and supply conditions for the shares of the investment company itself. Exchange traded funds are open-ended funds, so they can grow in size and decrease in size as people want to put their money in or take the money out of the fund. However, the shares of an ETF do trade on an exchange, so there is an up-to-the-minute price for the shares of the ETF, so intraday trading can take place. What makes ETFs different from traditional mutual funds is that new shares can be created or canceled on an ongoing basis, but ETFs use what is referred to as the in-kind creation process, whereby if you wish to receive new shares in the ETF, you do not pay cash into the fund, but rather you deliver a portfolio of securities which matches the underlying assets held by the fund already. This means that the fund does not need to sell securities to fund liquidations and does not need to invest the cash into securities of new investments into the fund because they're already held as securities. As a result of this, there exists arbitrage opportunities if the on exchange price of the ETF shares gets away from the net asset value. If the on exchange price is higher than the net asset value, the value of the underlying assets held within the fund, then it will be possible to buy those underlying securities in the fund and deliver them to the fund itself and via the in-kind creation process take delivery of the shares in the ETF. That has only cost you the net asset value, but then it would be possible to sell these on exchange for the higher current on exchange market price of the shares in the ETF, thus increasing the supply of ETF shares would reduce their price down closer to the net asset value. To facilitate this in-kind creation process, the fund needs to publish the underlying assets held within the fund, which is why most ETFs are passively managed, since most active fund managers do not wish to reveal the underlying securities held in their fund at all times. Finally, there are tax advantages in an ETF over traditional mutual funds, since if an investor wishes to sell their holding in an ETF, they can just sell their shares on a secondary on exchange market. With regular mutual funds, that investor would need to sell their shares back to the mutual fund, who would need to sell securities, potentially crystallizing capital gain and triggering a tax liability to get the cash to meet the liquidation to the investor.