Comparing ETF's, open-end, and closed-end funds. Created by Sal Khan.
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- Say one of the "large institutions" that buy a big block of shares, the ETF management will then invest that money. At some point this institution asks the ETF to buy back his shares, but even though they (ETF's management) has some cash available, most of it would be invested, so he wouldn't be able to buy all of the institution's shares. On the other hand if the management had all that cash at hand, it wouldn't be profitable for the ETF. How does the ETF deal with this liquidity problem?(17 votes)
- It is instantaneous. The institutional investor will normally look to redeem units only when the price is inefficient - that is, when the NAV for the ETF is too high compared to the price of the underlying assets. So, the investor submits a redemption order, the fund manager sells the underlying assets, and pays out the institutional investor. It is this mechanism that ensures that ETFs have a NAV that is correct for the underlying asset. Conversely, when the ETF units are 'on sale', the institutional investors will purchase blocks of units at that time. These two effects work to always push the ETF back to its 'correct' price. (I don't know about the US, but in Canada, the blocks in question are normally 50,000 units.)(13 votes)
- What are some real life examples of exchange traded funds?(6 votes)
- What is the difference between an Open ended MF and a Hedge Fund?
From Sals explanation they are doing the same thing exept from where they get their money from??(4 votes)
- . Hedge Funds are much riskier investment vehicle, since as mentioned above they are less tightly regulated by the commissions. Further they are allowed to invest in derivatives and other sophisticated instruments, hence they can pretty much structure the portfolio anyway they prefer to achieve their goal. Hedge funds on top of Management fee, charges performance based fee. They are less transparent than the MFs and it's not easy to assess the performances (rate of return) on these funds. Typically hedge funds are for the sophisticated investors who are willing to take greater risk in order to obtain a higher return.(8 votes)
- What about leveraged ETFs? How do those work?(3 votes)
- Do not quote me on this, but I am guessing from the name, they use derivatives and debt to garner leveraged returns from an underlying index.(3 votes)
- When we say traded on the markets, do we mean that they track the value of the underlying shares or they are traded as an individual product?(2 votes)
- How do 3x etfs work ? Such as UWTI(2 votes)
- The fund manager uses leverage (borrows money) to buy 3 times the exposure to the underlying security. They re-adjust the exposure daily (in most cases, because the funds are designed to magnify daily returns)(4 votes)
- So Closed end mutual fund is publicly traded at places like NYSE or NASDAQ, but Open end mutual fund isn't?(3 votes)
- I don't quite get yet why having an intermediary reduces the overhead for the fund. The fund still has to keep idle cash in case one of big investors wants to redeem shares. And it actually looks worse than open-end funds: random and independent individual investors on open-end funds could buy and redeem shares in such a way that the average result wouldn't alter the amount of available shares. With such big investors, though, the fund has to be prepared for really high volume trades, without the averaging effect, so the buffer needs to be even larger. What am I missing?(2 votes)
- I will try to answer my own question, after I've read a bit more about ETFs. ETFs don't need to keep a cash reserve because they don't trade shares for money. Instead, they trade their fund shares for the securities each share represents. So, let's say a particular ETF share represents stocks from S&P500 companies. Upon selling the share back to the ETF, the intermediary gets the corresponding S&P500 stocks, not cash. To get cash, the intermediary itself needs to sell these securities. Thus, new ETF shares can always be created in exchange for a bundle containing the securities they represent.(2 votes)
- In general, what's more popular among average and sophisticated investors: Open-ended funds, closed-ended funds, or ETFs? Why?(2 votes)
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. 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 end NAV, at the net asset value, per share. But the problem with it, 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, 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 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 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 kind of doing 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 a combination of the two, actually exists, and they're called 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 actually do trade hands on the stock exchanges. But these are officially ETFs. 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 of the interaction. So when you have just a regular, open-end mutual fund any individual investor can come to the fund 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, 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 exchange traded fund, instead of creating one share of 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 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 overhead. And since these big people go and kind of by these big blocks of shares, they can then go and sell them in the open market, or they could trade them in the open market. So if want to buy in to an ETF, instead of buying 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 a big block of-- maybe this is 10,000 shares right over here. And then they will trade in the open market. So 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 of this back and forth between each individual investor. 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 says that he's just an awesome stock picker. He can beat the market. He can 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, they're 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 it's 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. So it's a combination, they can grow arbitrarily large, and some of the largest exchange 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. You don't have to wait until the end of the day like an open-end fund.