Funds and ETFs Demystified

d17bb4b320180168dff4_Elaine_Phipps-1.png
Elaine Phipps
d17bb4b320180168dff4_Elaine_Phipps-1.png

Closed-end funds (CEFs), Open-end funds, Exchange-traded funds (ETFs) - what are the differences?  To help facilitate informed investment decisions, here are the basics:

Definitions and Differences

Open-end Funds – Shares in these funds are bought and sold at the end of each trading day based on the value of the fund’s net asset value or NAV.  The NAV is determined by taking the market value of the fund and dividing by the number of shares outstanding which changes each day as old investors exit and new investors enter.  There is no secondary market for open-end fund shares as purchases and redemptions are made directly to the fund manager 

Closed-end Funds – This type of fund has a fixed number of shares that are traded on an exchange, between investors.  As such, NAV is only part of the pricing determinant as supply and demand come into play.  It is common to see closed-end funds trading at a large premium or discount to NAV based on market demand.  Closed-end funds tend to be more actively managed, and often employ leverage to generate higher yields.  

Exchange Traded Funds – This type of instrument also trades on a live exchange, but the price tends to track more closely with the NAV than with closed-end funds given it is usually structured to replicate an index.  ETFs allow an investor to sell short, buy on margin, purchase very small amounts and provide settlement in three business days. 

Management Styles & Strategies

Mutual funds employ many management styles, the most common being indexed, actively-managed, lifecycle/target dated, balanced and tax-managed.   Index funds are developed to track an underlying index such as the S&P 500 and are very low cost.  Actively managed funds utilize a portfolio manager’s research and expertise, resulting in higher fees and frequently more portfolio turnover.  Lifecycle/Target date funds employ a mix of stocks and bonds, and are used when an investor is trying to become more conservative over time approaching events such as retirement or college tuition payments.  Balanced funds offer a set equity/fixed income allocation, typically in the 60%/40% range.  Finally, tax-managed funds are designed to limit turnover and thus distributions in order to keep the tax man at bay. 

Costs

ETFs and open-ended mutual funds have some of the lowest cost structures out there given the “indexed” and passive nature of their management.  The actively traded fee premium is tied to a manager analyzing and trading securities to maximize returns. Commissions and loads should also be taken into consideration, especially if an investor is purchasing small amounts on a regular basis.  With many no-load, open-end mutual funds, there are no fees on purchases, which is appealing to dollar-cost averaging investors.  Closed-end and ETFs often charge a brokerage commission for each purchase or sale, independent of the amount of the investment. 

Premium/Discount 

Closed-end funds are often traded at a substantial discount to NAV, possibly greater than 10%.  This appeals to certain investors who feel they can profit in several ways.  Not only do closed-end funds generate an attractive yield, but they can also offer upside profit potential should the discount to NAV disappear as the fund’s price appreciates.    However, this strategy should be used selectively and an investor needs to do his homework before purchasing.  

Yield 

 Some closed end-funds have enjoyed a recent rally due to their high dividend yields.  Many closed-end funds invest in municipal and corporate debt, using leverage to boost returns of as high as 15%.  Although this is attractive, especially now as investors search for yield and dividends, these high yields often reflect higher risk.  

How to Choose 

Prioritize what you want in terms of diversification, yield, liquidity and safety.  As with any investment, watch expenses, do research on performance, manager and trading history.  Although we still believe owning individual stocks gives an investor the ability to create his own mutual fund portfolio with more control and lower costs, the use of funds is appropriate in specific instances.  

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

TAP Into Another Town's News:

You May Also Be Interested In

Sign Up for E-News

Chatham

Upcoming Events

Fri, August 10, 6:00 PM

Museum of Early Trades and Crafts, Madison

Downtown Concert Series: Mama D & The Vexations

Arts & Entertainment

Carousel_image_8ab0795d7266f1cbd501_9f7a7a4ff4becf97e74c_regwalk_skyrw_9.30.18_email-1

Sun, September 30, 8:00 AM

College of Saint Elizabeth, Morristown

Walk to Fight Alzheimer's

Giving Back Health & Wellness

A Week at the Library of The Chathams Monday, July 9 – Sunday, July 15, 2018

Please note that the library will be closed on Sundays now through Labor Day weekend

PROGRAMS AND EVENTS

Our summer program is in full swing.  This week we are starting some of our most popular children’s programs, Chess for Kids and sewing classes with Miss Polly.  Children will also enjoy a visit from a special guest, Queen Maria Isabella from Medieval Times.  Teens ...

Out of the Darkness Suicide Prevention Walk: Fundraiser on Sept. 22nd at Chatham Cougar Field

July 21, 2018

To the Editor:

Hello, Friends,

The American Foundation for Suicide Prevention’s (AFSP) “Out of the Darkness” annual walk is being held on Saturday, September 22nd at 5:15 p.m. at Chatham’s Cougar Field, next to 312 Shunpike Road in Chatham, NJ  07928.  Registration begins at 4:30 p.m. 

You know of my lifetime support of efforts to combat ...

AtlantiCast

AtlantiCast: Episode 18

On this week’s AtlantiCast, you’ll find out how accessing care at Atlantic Health System is now easier, more affordable and closer to home than ever, learn which item from the produce aisle could be the newest weapon against cancer, see what Atlantic Health System, the New York Times and Instagram all have in common and much more.

 

 

Chatham's Meghan LeMon Awarded Degree from Miami University in Ohio

July 21, 2018

OXFORD, OH -- Meghan LeMon of Chatham was among more than 3,900 students from Miami University who received degrees during spring commencement exercises Saturday, May 19, 2018, at Millett Hall.

LeMon graduated MAGNA with a BA degree, majoring in Speech Path & Audiology.

Considered one of eight original "Public Ivies" in the country, Miami University is located in Oxford, Ohio.

5 Simple Ways to Save Water this Summer

According to the L.A. Times, the average American uses an estimated 98 gallons of water EACH day.  

Here are five simple ways you can save water, to help you conserve water this summer and take some pressure off of your drains.

1. Unless you are using it, turn the faucet off. How many of us still leave the water running while we shave or brush our teeth?According to ...