ETF vs. Closed End Fund

[renferme]

What is the difference between an ETF and a Closed End Mutual Fund ?

 

[Ted]

From a practical standpoint, the main difference is that ETF's are essentially a fixed "basket" of securities, similar to unit investment trusts, whereas closed end funds are actively managed. This allows the expenses of ETFs to be kept very low. (Closed end funds typically have high expenses that are not publicized nearly as widely as the expenses of open end funds.)

Per a previous discussion in this forum, ETF's apparently also have a provision that allows a (large) shareholder to exchange shares for shares of the underlying securities. This guarantees that the market value of the ETF will very closely track its net asset value -- not develop a premium or discount the way that shares of closed end funds do.

 

[eytonxav]

Also with ETFs, I think if you want to do a transaction, you can pick a price point during the day and are not tied to end of day settlement pricing.

 

[wzd]

I believe that there are some tax advantages with ETF's as well, or rather a lack of the disadvantages of mutual funds. ETF's also allow deritives, short sales, etc., which some index funds and enhanced index funds use.

I think http://mutualfunds.about.com/cs/etfs/a/exchangetraded.htm has more info on some of the differences. I think the trading cost is probably a key one. Trading cost is both bid/ask spread and fees.

Wayne

 

[wabmester]

Right about the tax advantages. ETFs are allowed to treat redemptions and purchases as like-kind exchanges, so there is no cap gains distribution unless redemptions exceed purchases in a given year as I understand it. Of course, the individual is still hit with cap gains if they sell.