Mutual Funds, Closed-End Funds and ETFs

An open-end fund, also known as a mutual fund, refers to the fact that the number of shares is not fixed when the fund sponsor establishes the fund. This allows the fund units or shares to be sold to investors anytime according to the needs of the investors. The fund sells shares directly to investors and redeems them as well. The shares are priced daily based on their net asset value (NAV), which directly reflects the value of the fund’s underlying securities.[1]

Closed-end funds issue a fixed number of shares through a single initial public offering (IPO). The number of shares to be issued and IPO time is predetermined. Following this IPO, the shares are traded in a secondary market between investors and cannot be redeemed by the issuing company. Price is greatly affected by supply and demand. Thus, the price tends to fluctuate away from the NAV.[2]

An exchange-traded fund (ETF) is a special type of open-end fund. It has a fixed number of shares and is traded on an exchange. It differs from mutual funds and closed-end funds as it is passively managed. ETFs are designed to closely track the performance of a specific sector, market benchmark, or index. ETFs tracking an index generally pays a return similar to that of the index.

Open-end funds and closed-end funds are the two basic modes of operation for funds. ETFs share characteristics of both open-end and closed-end funds. A comparison of the three mentioned funds is as follows:[3]

‌Source: Webull

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[1] Financial Training Services Inc., Securities Industry Essentials Exam Manual 3rd Edition, 103-106

[2] Financial Training Services Inc., Securities Industry Essentials Exam Manual 3rd Edition, 122

[3] Financial Training Services Inc., Securities Industry Essentials Exam Manual 3rd Edition, 127-128