How do mutual funds differ from ETFs?

Mutual funds and exchange-traded funds (ETFs) differ significantly in their trading mechanisms and management styles. The correct answer highlights that mutual funds are typically actively managed, meaning they have fund managers who make decisions on buying and selling assets within the fund to try to outperform a benchmark index. This management style can often lead to higher fees compared to index-tracking ETFs.

Additionally, mutual funds are priced only once at the end of the trading day. Investors buy or sell shares at this daily price, reflecting the net asset value (NAV) of the fund at that time. In contrast, ETFs trade on an exchange throughout the day like individual stocks, with their prices fluctuating based on supply and demand.

This distinction in trading frequency and management style is crucial for investors to understand, as it affects liquidity, cost, and investment strategies associated with these two types of investment vehicles.