5.4 Closed-End Funds & ETFs
While open-end mutual funds redeem shares at NAV, closed-end funds and ETFs trade continuously on secondary exchanges throughout the trading day.
Key FINRA Exam Takeaways
- Closed-End Funds: Fixed capitalization (one IPO), trade on secondary exchanges, prices determined by supply and demand (trade at premium or discount to NAV).
- Closed-end funds CAN issue common stock, preferred stock, and debt bonds.
- Exchange-Traded Funds (ETFs): Track an index, trade intraday, can be bought on margin and sold short.
- ETFs have greater tax efficiency than mutual funds due to in-kind creation and redemption mechanisms.
- Investors pay standard secondary market broker commissions when trading closed-end funds and ETFs.
| Feature | Open-End Mutual Funds | Closed-End Funds | ETFs |
|---|---|---|---|
| Capitalization | Continuous primary offering | Fixed number of IPO shares | Flexible creation/redemption |
| Trading Venue | Redeemed with fund sponsor | Secondary exchanges (NYSE/Nasdaq) | Secondary exchanges (NYSE/Nasdaq) |
| Pricing | Forward NAV calculated daily | Market supply & demand (Premium/Discount) | Market price tracking intraday NAV |
| Capital Structure | Common shares only | Common, Preferred, Bonds | Common shares only |
| Margin & Shorting | No (Marginable after 30 days) | Yes, full margin and short selling | Yes, full margin and short selling |
Knowledge Checkpoint • Section 5.4
Which of the following characteristics distinguishes a closed-end management investment company from an open-end mutual fund?