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I'm trying to understand the difference ETFs and index funds in terms of selling them (if you want to get rid off them quickly for any reason).

As far as I understand, if you want to sell an index fund you know 100% sure that you will sell it the same day to request it, when the market closes (so you might need to wait some hours, with all the fluctuation that might involve).

On the other hand, ETFs are traded like stocks, so if you want to sell it you might find that no one wants to buy it. If you need to sell your ETF fast because of an emergency, you might have problems. This is the reason you need to pay attention to the ETF's bid-ask spread, to be aware if you will find easy to sell it if you need (if the ask is high, many people will be willing to buy when you want to sell).

Is the above correct, specially in terms of the problems you might have when you want to sell?

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  • An ETF based on an index will always have an intrinsic value, based on the value of its individual components. You'll always be able to sell it. At worst, there will be a small haircut due to a wide bid/ask spread. Nov 26, 2019 at 19:23
  • @Bob you say that you can always sell it. That's what I don't fully understand. If no one wants to buy it you won't be able to sell it, right? While with index funds the index managers are forced to give you your money back?
    – Martel
    Nov 26, 2019 at 19:28
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    @Martel there are market makers for ETFs that guarantee that they can be sold near their net asset value.
    – D Stanley
    Nov 26, 2019 at 19:30
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    When necessary, an Authorized Participant arbitrages disparities between the value of an ETF and its current price. Because of this, the ETF's price will always track the value of the underlying components fairly closely. Nov 26, 2019 at 19:33

2 Answers 2

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On the other hand, ETFs are traded like stocks, so if you want to sell it you might find that no one wants to buy it.

Well someone will almost certainly want to buy it, but maybe for slightly less than its net asset value. Otherwise there would be an arbitrage opportunity to buy the ETF very low and short its constituents.

If liquidity is a concern then ETFs are probably a better choice since they can be sold intra-day. If there is a downward intra-day trend, with a mutual fund you're forced to wait until the end of the trading day to cash out.

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In general that is true, but most ETFs have market makers which will keep the bid-ask spread close to the underlying value.

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