Key Takeaways
- The primary difference between exchange-traded funds (ETFs) and investment trusts is that the former are open-end funds, while the latter are closed-end funds.
- Investment trusts issue a fixed number of shares at inception, while ETFs can issue new shares based on investor demand.
- Investment trusts are more likely than ETFs to trade at prices different from their net asset value (NAV).
- Investment trusts typically have lower liquidity and are more actively managed than ETFs, which might increase trading costs and management fees.
- ETFs usually are more tax-efficient than investment trusts because capital gains can be reduced through the ETF creation and redemption process.
ETF vs. Investment Trust: An Overview
Exchange-traded funds (ETFs) and investment trusts are two popular investment products, each with specific characteristics, advantages, and disadvantages. The primary difference between them is how they’re structured.
Investment trusts are closed-end funds with a fixed number of shares set at an initial public offering (IPO)—although later share issuance can occur. Many ETFs are organized as open-end funds, while some are UITs or other structures. Authorized participants create or redeem ETF creation units in response to market demand.
What Is an ETF?
Registered ETFs typically hold a portfolio of securities and/or other assets. However, unlike mutual funds, they trade on an exchange and can be bought or sold like a stock. Many ETFs seek to track an index or targeted exposure, while others are actively managed.
ETFs have become popular because many of them can provide diversified exposure at relatively low cost. They can be used in a variety of investment strategies, from passive index tracking to actively managed portfolios.
ETFs can offer diversified exposure to specific asset classes, currencies, sectors, or indexes while trading on exchanges like individual stocks. ETFs are open-end funds, which means that their management can create or redeem shares based on investor demand. This should keep their share price in line with the net asset value (NAV) of their underlying assets.
Highly liquid ETFs often have lower bid-ask trading costs than less-liquid closed-end funds. For example, the SPDR S&P 500 ETF Trust (SPY) has an expense ratio of 0.09% and turns 64 million shares per day on average. Most ETFs, and ETFs relying on Rule 6c-11, disclose portfolio holdings daily.
What Is an Investment Trust?
Investment trusts, also called closed-end funds, pool resources from multiple investors to buy a portfolio of assets. Assets might include equities, commodities, fixed-income securities, or real estate.
As closed-end funds, investment trusts issue a fixed number of shares at inception that doesn’t change. This has several effects:
- Long-term strategies: This stability in share numbers allows fund managers to focus on long-term investment strategies without concern for short-term redemption pressures.
- Trading at premium or discount: Investment trust shares can trade at a premium or discount to their NAV, a key characteristic to consider. This can create opportunities to buy shares of investment trusts at a discount or sell them at a premium.
- Less need for liquidity: The closed-end structure means fund managers don’t need to keep large amounts of cash on hand for redemptions and can put more to work for investors in other assets.
Boards with independent directors or trustees oversee fund governance and management arrangements. Boards oversee whether management operates consistently with the fund’s stated investment objectives.
Investment trusts can adopt active or passive investment strategies and cater to income-seeking or growth-oriented investors. Some jurisdictions grant tax advantages to investment trusts, enhancing their tax efficiency.
While investment trusts can offer valuable diversification and investment opportunities, they have risks. Therefore, investors should assess their financial goals and risk tolerance before including them in their portfolios.
Fast Fact
Spot bitcoin ETPs, commonly called ETFs, began U.S. trading in January 2024.
Key Differences Between ETFs and Investment Trusts
ETFs and investment trusts are both common investment vehicles, but they have significant differences in their structure, management, and tax efficiency. ETFs are managed investment funds that aim to mirror the performance of a specific index or asset class. They trade on stock exchanges, providing investors with greater liquidity and flexibility. By contrast, investment trusts are closed-end funds with a fixed number of shares and can trade at a premium or discount to their NAV. This can create unique opportunities and risks.
While investment trusts also trade on exchanges, they typically have a lower volume of trade, which could increase trading costs. Also, management styles differ substantially between ETFs and investment trusts. Large ETFs that track bellwether stock indexes, such as the S&P 500, typically have ultra-low management fees because of their passive approach.
Investment trusts tend to be more actively managed, requiring the expertise of a skilled investment manager to navigate market conditions. Investment trusts also regularly borrow money to invest, which can enhance returns but also amplify losses. Meanwhile, these investment products have differing tax implications. Many ETFs are tax-efficient because their in-kind redemption process can reduce capital-gains distributions. Investment trusts, however, may distribute capital gains, creating a tax liability.
While both ETFs and investment trusts can offer diversified investment choices, understanding their key differences can help you make more informed investment decisions aligned with your financial goals.
Key Differences
ETFs
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Greater liquidity and flexibility because they trade like stocks
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Higher trading volume
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Often have lower trading costs
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May be passively managed and therefore have lower expense costs
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Tax-efficient
Investment Trusts
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Closed end-funds
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Lower trading volume
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May have higher trading costs
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Will usually be actively managed and have higher management fees
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May be less tax-efficient
Advantages and Disadvantages of ETFs
Advantages
- Diversification: ETFs offer instant diversification at low cost. For instance, the SPY ETF tracks the S&P 500 Index, offering investors exposure to 500 large-cap U.S. stocks. This diversification helps spread risk, reducing the impact of a poor performance from individual stocks or underperforming sectors.
- Liquidity: ETFs trade on stock exchanges, making many of them highly liquid. Ample share turnover helps to reduce transaction costs, such as slippage and high bid-ask spreads. Plus, it’s easy to buy or sell ETF shares of popular ETFs throughout the trading day. For example, the Invesco QQQ Trust (QQQ), which is for those who favor tech stocks and tracks the performance of the Nasdaq-100 Index, has an average daily trading volume of roughly 50 million shares as of July 2026.
Disadvantages
- Lack of control: Many ETFs are passively managed, meaning you have no say in the individual securities included in the fund’s portfolio. For instance, if you want to exclude a specific company from your portfolio for ethical reasons, you can’t do so in an ETF tracking a broad index like the S&P 500 or the Nasdaq-100.
- Tracking errors: ETFs aim to replicate the performance of an underlying index. However, tracking discrepancies can occur. For example, the ETF’s expenses, deducted from the ETF’s returns, could cause its performance to slightly deviate from that of the index, currency, or sector it covers. To illustrate, the iShares MSCI Emerging Markets ETF (EEM) had a 10-year average annual return of 9.58% as of June 30, 2026, compared with the benchmark index’s 10.07% return over the same period.
Fast Fact
In a surprise move, on May 23, 2024, the SEC approved exchange rule-change proposals from NYSE Arca, Nasdaq, and Cboe BZX to list and trade ether-based ETPs.
Advantages and Disadvantages of Investment Trusts
Advantages
- Closed-end structure: Investment trusts’ structure lets portfolio managers take a longer-term perspective without buying or selling assets to meet redemptions. For instance, the managers of BME can focus on the fund’s longer-term investment objectives without worrying about a flood of redemptions during a market downturn.
- Leverage: Some investment trusts use leverage to enhance returns. This can magnify gains during favorable market conditions when they borrow money to invest. For example, the PIMCO Dynamic Income Fund (PDI) had 33.28% total effective leverage as of Dec. 31, 2025. PDI’s reverse repurchase agreements are a form of leverage that can amplify returns or losses; whether elevated bond yields help returns depends on portfolio performance and financing costs.
Disadvantages
- Premiums and discounts: Investment trusts may trade above or below their NAV. While a premium could indicate strong demand, a discount may represent a lack of investor interest. For example, when BME traded at a -7.36% discount to its NAV on March 7, 2025, this meant that, potentially, investors could receive less than the value of the fund’s underlying assets.
- Liquidity and costs: Investment trusts, like ETFs, trade on stock exchanges. However, many investment trusts may be less liquid than large, heavily traded ETFs. Their fixed-share structure can contribute to lower secondary-market liquidity versus ETFs with active creation/redemption. Lower trading activity may result in wider spreads and higher execution costs. As a result of lower share turnover, you might incur higher trading costs and wider bid-ask spreads. You could also face liquidity issues because trading in a listed fund’s shares can be halted or suspended by an exchange or regulator under specified circumstances. Finally, many investment trusts trade less actively than the largest ETFs.
Are ETFs or Investment Trusts Better for Long-term Investments?
Both can be suitable as long-term investments. Some investors prefer ETFs for their lower costs and index-tracking nature, making them potentially better for passive, long-term strategies. With their fixed share structure, investment trusts can be suitable for long-term investors looking for potential income sources and who can handle price fluctuations when the shares go above or below NAV.
How Do Management Styles Differ Between ETFs and Investment Trusts?
ETFs and investment trusts have distinct management styles. Passive index-tracking ETFs generally involve less discretionary security selection than active funds. By contrast, actively managed investment trusts may have managers select and adjust holdings to pursue their objectives or outperform a benchmark. Some investment trusts use leverage or debt, which can add to the active management of a fund.
Are There Differences in Dividends Between ETFs and Investment Trusts?
Yes. Some investment trusts may offer higher yields, in part because gearing can magnify income, and because some of them are managed with income-focused objectives. ETFs can pay dividends, too, but their yields derive from their underlying assets. ETFs focused on capital appreciation may pay lower dividends than income-focused ETFs, depending on their holdings
Are There ETFs or Investment Trusts Focused on Niche Markets?
Yes. Certain ETFs and investment trusts zero in on quite specific markets or themes. Examples across ETFs and investment trusts include biotechnology, blockchain, clean energy, technology, space-related, and other specialized themes. There are geographically targeted ETFs and investment trusts, some regions of which might be underrepresented in mainstream investment funds.
These funds can be a great opportunity to put your money into areas and themes that you’re passionate about. However, they also have their own risks, including potentially higher volatility and setbacks associated with a tight investment focus.
The Bottom Line
ETFs and investment trusts differ in their structure and management. ETFs are open-end funds, allowing for more efficient trading close to their NAV. They can offer diversified exposure across various asset classes and are frequently passively managed, leading to lower management fees.
By contrast, investment trusts have a closed-end structure, issuing a fixed number of shares at inception, which means that they can frequently trade at a premium or discount to the fund’s NAV. Investment trusts, which usually have more active management and use leverage, may have lower liquidity, affecting trading costs compared with more liquid ETFs.
Choosing between ETFs and investment trusts requires a careful consideration of liquidity, the fund’s use of leverage, tax efficiency, and whether the fund trades at a premium or discount. Before investing in either, be sure that it meets your long-term financial goals. It’s always prudent to seek out advice from a financial advisor.