Mutual Funds and Other Investment Companies 4-10
may do the best during a rising market, but they will probably perform the poorest
during a declining market. Funds are continually changing the fund manager as
well. This information may take additional research to uncover.
4.8 Closed-End Funds, Exchange-Traded Funds, and Hedge Funds
A. Closed-End Funds Performance Information
Remember, closed-end funds offer a fixed number of shares, and these shares
are bought and sold on the open market. The closed-end fund quotes are listed
with the other common and preferred stock listings contained in the stock tables
for established exchanges, such as the NYSE. The closed-end fund quotes have
"Fd" as part of the name and do not have P/E ratios listed.
B. The Closed-End Fund Discount Mystery
Because shares in closed-end funds trade in the marketplace, share prices
typically differ from the NAV. Interestingly, most closed-end funds trade at a
discount from NAV. This appears to allow investors to buy stock at a discount
through closed-end funds. This discount also fluctuates over time, sometimes it is
very wide, and at other times it almost disappears. If an investor interprets funds
trading at a large discount as a good investment, this may not be the case. For
the investor to profit, the discount must narrow. Occasionally closed-end funds
will sell at a premium to NAV. This is similar to a front-end load.
Closed-end funds are initially sold to the public as an IPO, and the price is equal
to the fund's NAV. Since the fund promoter is paid a fee "right off the top," the
fund will likely start selling at a discount. Therefore, newly offered closed-end
funds are generally not good investments.
C. Exchange-Traded Funds
Exchange traded funds (commonly called ETFs) are a relatively recent
innovation. They began about 1993, but their growth mushroomed in the late
1990s. As of 2015, there were over 1,400 ETFs trading.
Basically, an ETF is an index fund. When an investor buys an ETF, the investor
owns a basket of securities. A well-known ETF is the “Standard and Poor’s
Depositary Receipt” or SPDR. This ETF is the S&P 500 index, and it is commonly
called “spider.” An ETF that represents the Dow Jones Industrial Average is
commonly called “diamond.”
ETFs trade like a closed-end fund. They can be traded intra-daily, and can be
sold short. They generally have low fund expenses, but investors must pay
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