What is the difference between an Exchange Traded Fund (ETF) and a Closed End Fund?

Question

There has been talk in the press of upcoming actively managed ETF's. That seems to me to be a closed end fund.

Regarding tracking of indexes, some of the newer ETF's use indexes created just so the ETF can track them. The ETF is created, and the index is simultaneously created in such a manner as to be favorable for the ETF.

Answer 1

The main difference is that ETFs track an index (for example, the S&P 500), and for various reasons they trade at almost exactly their NAV (Net Asset Value, the value of the stocks held by the fund).

Closed end funds are like ETFs in that their shares trade on the open market, but they don't follow an index. They are "actively managed": the managers choose stocks based on their judgement. For various reasons, they may trade at a "premium" (the share price is higher than the NAV) or a "discount."

With an ETF, you always know exactly what stocks the fund holds because it tracks the index. This is why the price is the same as the NAV (arbitrage keeps the price the same).

With a closed end fund, you may not know until the quarterly report.

Both your comments are correct. There's talk of allowing ETFs that are actively managed. Not sure how that would work. I'm guessing that the fund's holdings will be reported daily.

And yes, some ETFs track specially-created indexes, such as indexes on water reources or alternative energy. This is another advantage of ETFs: some of them track specialized market sectors not available in funds.

Answer 2

ETF - Options are traded on ETFs not on MF. You can short sell ETF not MF. ETFs are traded on the amex and MF are purchased from the fund family. You do this through a broker typically, but they aren't traded on the open market. ETFs are transparent. You know what is held inside an ETF. You typically only have access to the top 10 holdings within a MF, unless you contact the company directly and ask for the holdings. They will probably be current as of the end of the most recent quarter. ETFs trade at their NAV, b/c of the options and short-sell feature, where as there can be a disconnect between a MF NAV and its underlying value. These are a few of the differences but not all.

Answer 3

The main difference between ETF and closed end fund is ETF trade like a stock with net asset value whereas closed end fund
trade with undetermined value of asset which could be higher or lower than the asset value. The ETF follow an index whereas
closed end fund may be actively managed with a variety of
stocks.

Answer 4

You're talking about two very different beasts, here. A Closed End Fund is a mutual fund that is no longer accepting any new investors, or one that will only accept a certain number of investors. In contrast, there are mutal funds that will keep accepting new investors without any limitations. Mutual funds are valued once a day, in contrast to stocks, whose value may fluctuate over the course of a day depending on the whims of investors. An Exchange Traded Fund (ETF) is a mutual fund that behaves like a stock--you buy units of the fund and prices go up and down, just like on the stock market. Most mufual funds have managers who make decisions on what to invest in; in contrast, ETFs tend to be indexes--they consist of investments selected according to certain criteria (e.g., the importance of each share to the economy) and have minimal management. I hope this helps.