As an investment vehicle, mutual funds ie open end funds are often criticized for two reasons. First being the price of their shares and being able to trade only at the end of the day or at the closing price. In particular, transactions such as buying and selling cannot be done at intraday prices, but only at the closing price. Secondly, although the tax treatment of open end funds is not discussed, it is noted that they are inefficient tax vehicles. This is because withdrawals by some fund shareholders may result in taxable capital gains to shareholders who retain their positions.

Due to these two drawbacks of mutual funds, a new investment vehicle with many of the same characteristics of mutual funds is introduced to the financial market through the ETF - Exchange Traded Fund. This investment vehicle is similar to a mutual fund but trades like stocks on an exchange. Although they are open-end funds, ETFs are similar to closed-end funds in a sense, with a smaller premium or discount from NAV. In an ETF, the investment advisor takes responsibility for managing the portfolio so that it accurately replicates the index and index returns, as supply and demand determine the secondary market price of the shares. The exchange price may deviate slightly from the value of the portfolio thus providing some uncertainty in pricing. However deviations remain small as intermediaries can create or redeem large blocks of shares at NAV on any given day which limits deviations significantly.

Another advantage of ETFs is that ETFs can be traded throughout the day at current prices and have the flexibility to short sell and buy limit orders, stop orders, and on margin, none of which can be done with an open end. ETFs overcome the disadvantages of open end funds in terms of fund taxation.

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