Mutual funds and exchange-traded funds can hold identical portfolios and still behave differently for the investor, because the way shares are bought and sold is structurally different.
Mutual fund orders settle at one daily price
A mutual fund calculates net asset value once each trading day, dividing the value of its holdings by the shares outstanding.
Orders placed during the day are executed at that day's calculated value, regardless of when they were entered.
The investor transacts with the fund itself, which creates new shares for purchases and redeems shares for sales.
ETF shares trade between investors
An ETF trades on an exchange throughout the session, and the price at any moment is set by buyers and sellers rather than calculated by the fund.
The investor generally buys from another investor, not from the fund, which is why an ETF order behaves like a stock order in every respect.
That includes bid-ask spreads, limit and market order types, and the ability to transact at a known price at a chosen moment.
Creation and redemption keeps price near value
Large institutional participants can exchange baskets of underlying securities for ETF shares and the reverse, which is the mechanism that ties price to underlying value.
When the market price drifts above the value of the holdings, creating shares becomes profitable, and the added supply pushes the price back toward value.
The correction runs both directions, which is why liquid ETFs generally trade close to their underlying value without any obligation to do so.
Cash flows affect shareholders differently
A mutual fund meeting redemptions may need to sell holdings, and any realized gains from those sales are distributed to the shareholders who remain.
An ETF's in-kind creation and redemption process reduces how often the fund itself needs to sell, which changes the pattern of distributions.
How any distribution is treated on a given return depends on the account type and individual circumstances, which is a matter for a tax professional.
Costs appear in different places
Both charge an expense ratio deducted from fund assets, and that cost is continuous and does not appear as a line on a statement.
ETFs add transaction-level costs in the form of the spread and any commission, which fall on the investor at the moment of trading rather than over time.
Some mutual funds carry sales charges or minimum investment requirements, so the total cost comparison depends on holding period and trading frequency rather than the expense ratio alone.