http://www.ici.org/viewpoints/view_12_et...
They are both mutual funds and they are both open ended. But they operate completely differently although you are not specific about your idea of MFs. You have Unit Trusts, OEICS, Investment Trusts, ETFs and of course Hedge Funds (and more). They are all different in structure and operation.
Regarding inflows and outflows you only need to know if the MF is open or closed ended. A Unit Trust (and an ETF) would be open but an Investment Trust would be closed.
Now UT & ETF are both open-ended but completely different. You are roughly correct about a UNIT Trust & OEIC but an ETF uses the Market Makers to regulate the fund.
So there may be a FTSE100 Index ETF that is listed on LSE. The ETF share is originated by MMs buying all the stocks in the FTSE100 and swapping these through the provider for new ETFs. If there are lots of sellers of the ETF then the MMs may buy them but selling the underlying stocks to cover.
The MMs can make money by jobbing the underlying stocks (going short or long) and this helps reduce the TER of ETFs.
Not a brilliant explanation but hopefully gives more of the idea for you.
My understanding of an ETF comes primarily from contrasting it with a mutual fund. Here are my understandings/assumptions that may need to be corrected to answer the question:
To use a simple example, if I want to purchase $100 of a mutual fund, I send a check for $100 to the mutual fund company and they create a share of the fund and issue it to me. The assets in the fund go up by $100. If no one investing in that mutual fund wanted to sell their shares that day, it doesn't matter. The mutual fund is taking my money and giving me a share in the mutual fund. If I want to redeem, I tell the mutual fund and they write me a check - thereby reducing their overall assets.
However, my understanding is that when I'm purchasing a share of an ETF, I'm buying a share from someone who already holds a share in the ETF. I'm not sending $100 to the sponsor of the ETF and increasing the assets in the ETF; I'm purchasing a share of the ETF on the open market that is already owned by someone else. In the same way, when I sell, I'm not getting a check from the ETF sponsor, just existing shares from another investor.
This difference is is what can create tax advantages for the ETF. The ETF will never have to sell off securities and trigger captial gains taxes to have enough cash for redemptions because the ETF share is being sold by one investor and bought by another.
So how could an ETF have net inflows or outflows? Every redemption (sale) is matched by an equal purchase.
