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Video transcript

so far we looked at open end mutual funds that can kind of grow and shrink depending on how many investors want to invest in that fund or they can grow by creating new shares and selling those shares to the general public and they can shrink because someone who wants their money back goes to the fund and says you have to buy this back from me at the nav at the net asset value per share but the problem with it actually there's a couple of 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's point of view is they can only buy or sell at the end of the day and that will only happen at the net asset value per share and on top of that the fund manager or whoever's running the fund has to worry about all of these in actually transacting between all of these different investors now on the other side of things we looked at the closed-end fund the closed-end fund couldn't kind of dynamically grow and shrink by creating new shares or by buying them back but what was good about them is is that they were freely trading on exchanges maybe on the on the Nasdaq or the New York Stock Exchange and because there was none of this kind of back and forth between the fund managers or whoever was man who was kind of doing the the operations of the fund and the investors they didn't have to put cash aside and they didn't have to have all of this kind of 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 a fund that could grow dynamically that could create new shares when there was demand from investors but at 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 two actually exists and they're called exchange-traded funds exchange exchange-traded funds or ETFs for short and you might say hey wait isn't a closed-end fund exchange-traded and it is these these actually do XJ trade hands on on the stock exchanges but these aren't officially ETF's when someone tells you an etf the way to think about it it's a combination of both but what it does is it limits the interaction so when you have just a regular open end mutual fund any individual investor can come to the fund and say here is my share buy it back from me eliminate that share and that creates a lot of overhead here on an exchange-traded fund only approved people only and there's these are usually large institutions can go to the fund and say I want to buy or redeem a big block of shares so on an exchange-traded fund instead of creating one chair at a time it might create 5,000 or 10,000 or 100,000 shares at a time and on the other side of things if someone wanted to redeem their shares they would redeem five two thousand ten thousand or a hundred thousand 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 costs on overhead and since these big people go and kind of buy these big blocks of shares they can go and go and sell them in the open market they could trade them in the open market so if you want to buy and buy into an ETF instead of buying it directly from the 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 maybe this is ten thousand shares right over here and then they will trade in the open market so you get you kind of get the best of both worlds and in general ETFs also have lower fees and they have lower fees one because they don't have to do all this back and forth between each individual investor and most ETFs are not actively managed when I say actively managed I'm talking about the situation where you had Pete and Pete says that he's just an awesome stock picker he can beat the market he can you know do all of you know he really researches companies and he thinks that there's some value that he creates by doing that when something is not actively managed and exchange-traded funds tend to not be there saying look we're just going to buy the market or we're just going to buy some commodity so when you go into an exchange-traded fund you're really just trying to buy some asset class maybe it's the S&P 500 maybe you are made some type of exchange-traded funds that buys gold as 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 need as much in management fees so they will have lower fees they will have lower fees so it's a combination they can grow arbitrarily large and some of the largest exchange exchange-traded funds are super huge they have much lower fees and they have this trade ability you can trade them at any kind of second on the markets you don't have to wait until the end of the day like an open-end fund
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