ETFs versus mutual funds

Both exchange-traded funds (ETFs) and mutual funds are professionally managed baskets of individual stocks, bonds, or a combination of the two. However, they differ in how they trade, their liquidity, and costs. This article examines the key differences between ETFs and mutual funds and provides a quick glossary of common terms associated with ETFs.

Key differences: ETF series versus Mutual Fund series

While ETFs and mutual funds share many similarities, the largest difference between the two is how they are traded. ETFs trade on a stock exchange and can be bought and sold throughout the trading day, whereas mutual funds are bought and sold based on the closing value of the fund at the end of the trading day.

A standalone ETF is structured as its own fund. Like a mutual fund, it typically invests within a certain area of the market, or has a particular investment mandate, such as large-cap equities, investment-grade bonds, or a specific industry sector.

In contrast, an ETF series, like those offered by NEI Investments[JW1] , is a class of an existing mutual fund that is listed on an exchange. The series provides ETF-like access to the same underlying portfolio and strategy as the mutual fund’s traditional series.

Glossary of common ETF terms

Below are some terms commonly used with ETFs. Additional definitions are included in NEI’s Simplified Prospectus.

Authorized Participant (AP) / Market Maker - A financial institution that facilitates the creation and redemption of ETF units directly with the issuer. In Canada, these participants are more commonly referred to as market makers and play a key role in maintaining liquidity and price alignment with NAV.

Bid-Ask Spread - The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for ETF units. It represents an implicit cost to investors when trading on an exchange.

Creation Unit / Prescribed Number of Units (PNU) - The standard block size in which ETF units are created or redeemed in the primary market. PNUs are transacted between the issuer and market makers.

Designated Broker - A specific market maker appointed by the issuer to provide continuous two-sided quotes on the exchange and support orderly trading of the ETF series.

Designated Units Outstanding - The total number of ETF units that have been created and are currently in circulation in the market.

Exchange (Listing Exchange) - The marketplace (e.g., TSX) where ETF units are listed and traded, and which sets listing requirements and oversees ongoing trading.

Indicative NAV (iNAV) - An estimate of the ETF’s net asset value calculated and disseminated throughout the trading day, used by market participants as a reference for pricing.

Market Price - The price at which ETF units trade on the exchange, determined by supply and demand. This may differ slightly from NAV.

Net Asset Value (NAV) - The per-unit value of the fund’s assets minus liabilities, typically calculated once daily after market close and used as the reference point for valuation.

Portfolio Composition File (PCF) - A daily file provided to market makers that details the basket of securities and/or cash used for creations and redemptions. It supports pricing and hedging activities.

Premium / Discount - The difference between an ETF’s market price and its NAV. A premium means the ETF is trading above NAV; a discount means it is trading below NAV.

Primary Market - The market where ETF units are created and redeemed directly with the issuer by market makers, typically in large blocks.

Secondary Market - The exchange where investors buy and sell ETF units throughout the trading day.

NEI’s ETF series brings together actively managed strategies, proven investment expertise, and the flexibility efficiency of an ETF. With cost-effective options across the risk/return spectrum, they offer more choice for building diversified portfolios, adding targeted exposures, and meeting today’s evolving portfolio needs.