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Chapter 22. Comparing ETFs and Mutual Fu... > Distinguishing Among ETFs, Closed-En...

Distinguishing Among ETFs, Closed-End Funds, and Mutual Funds

ETFs joined a number of existing investment company products, thereby causing some confusion between the traditional products—investment unit trusts, closed-end funds, and mutual funds—and this new innovation. It is worthwhile to remember the following:

  1. Both closed-end funds and ETFs trade during the day on exchanges, can be bought on margin, and can be shorted. In contrast, mutual funds are bought and sold at the end of the trading day when the NAV is calculated. This distinction is not important for the long-term investor, but for those with short horizons it could matter.

  2. ETFs are currently passive in nature, following an index. (This might change in the future.) Closed-end funds and most mutual funds are actively managed. Of course, index funds are passively managed by definition.

  3. ETFs can trade at discounts or premiums, but their mechanics are such that they are very likely to trade close to their NAV. Closed-end funds almost always trade at discounts or premiums, with discounts predominating in many years. Mutual funds trade at NAV.


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