Mutual funds and ETFs
Exchange Traded Funds (ETFs) Comparing ETF's, open-end, and closed-end funds
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- So far we looked at open end mutual fund
- that can kind of grow and shrink depending on how many investors
- want to invest in that fund and they can grow by creating new shares
- and selling those shares to general public
- and they can shrink because someone who wants their money back
- goes to the fund and said
- “you have to buy this back from me
- at the NAV (net asset value) per share.”
- But the problem with this actually there’s a couple problems
- is that the manager here has to always keep a little cash
- set aside in case some of the investors come to him and say
- “Hey, I want you to buy my share back. I want liquidity.”
- And the other thing that they have to worry about
- or at least from the investor point of view is
- they can only buy or sell at the end of the day
- and that will only happen onnet asset value per share
- and on top of that the fund manager or whoever is running
- the fund has to worry about all of these actually transacting between
- all of these different investors. On the other side of
- thing we look at the closed end funds, the closed end funds
- couldn’t kind of dynamically grow and shrink by creating
- new shares or by buying them back but what
- was good about them is that they are freely trading on exchanges
- may be on the NASDAQ or New York stock exchange.
- And because there was non of this kind of back and forth
- between the fund managers or whoever was a kind of doing
- the operations of the fund and the investors, they didn’t
- have to put cash aside or they didn’t have to have
- kind of all of the overhead in dealing with the investors.
- Now, you’re probably saying “well, isn’t there a way
- or maybe there’s a way to get the best of both worlds of fund
- that could grow dynamically, that could create new shares
- when there was demand from investors.
- But in the same time, those new shares could be
- traded on an open market and that combination
- or you can kind of view it as the combination
- of the due actually exist and they’re called Exchange Traded Funds.
- Exchange Traded Funds. or ETF for short.
- And you might say “Hey wait, isn’t a Closed End Funds Exchange Traded?”
- And it is. These actually do exchange trade hand
- on the stock exchanges, but these aren’t officially ETF.
- So someone told you an ETF, the way to think about it is a combination of both.
- But what it does is, it limits the interactions.
- So when you have this regular open end mutual fund,
- any individual investors can come to the fund and say
- “Here is my share, buy it back from me,” eliminate that share.
- That creates a lot of ever head here.
- On an Exchange Traded Funds, only approved people only and these are usually large institutions
- can go to the fund and say “I want to buy or redeem a big block of shares.”
- So an Exchanged Traded Funds instead of creating one share at a time,
- it might create 5,000 or 10,000 or 100,000 shares at a time.
- And on the other side of a thing, if someone wants to redeem their shares,
- they would redeem 5,000, 10,000, or 100,000 shares at the same time.
- And what’s good there from the funds point of view is that
- they don’t have to deal with all of these small transactions,
- they can do big transactions with big entities so that saves
- them cost on over head. And since these big people
- are going kind of buy these big blocks of shares, they can go and sell them
- in an open market, they can trade them in the open market.
- So if you want to buy into the ETF instead of buy it directly from the ETF,
- you would buy it from one of these big institutions that buy big blocks of shares.
- So they’re now buying, you know a big block of, you know
- may be a 10,000 shares right over here and will trade in the open market.
- So you kind of get the best of both worlds.
- And in general, ETF also have lower fees.
- They have lower fee, one because they don’t have to do all this back and forth
- between each individual investors and most ETFs are not actively
- managed and when I say “actively managed,”
- I’m talking about the situation where you had Pete, and Pete said
- “He’s just an awesome stock figure, he can beat the market,
- He can you know, do all of you know.
- He really researched his company and he thinks that
- there are some values that he creates by doing that.
- When something is not actively managed, and Exchanged Traded Funds
- tend to not be there, saying
- “Look, we’re just gonna buy the market or we’re just gonna buy some commodity.”
- So when you go into the Exchanged Trade Funds,
- you’re really just trying to buy some assets classes,
- maybe it’s the SNP500, maybe some types of Exchanged
- Traded Funds that buys gold assets or maybe it’s buying some other type of commodity.
- And so because it’s not actively managed,
- the argument would be that they don’t do as much as managing fees.
- So they will have lower fees.
- They will have lower fees.
- So the combination, they can go arbitrary large,
- and some of the largest Exchanged Traded funds are super huge.
- They have much lower fees and they have this tradability,
- you can trade them at any kind of second on the market,
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