- Both ETFs and CEFs are primarily traded on the stock exchanges. This sets them apart from mutual funds where the shares are sold and redeemed by the fund company. The share price of mutual funds is set once a day after the market closes and the price of the shares is not known when a mutual fund order is placed. The market trading of ETF and CEF shares allows investors and traders to buy and sell the shares throughout the trading day at prices that change with market conditions. This allows both short- and long-term trading of these two types of funds. Traders can get current share values anytime the stock markets are open.
- Closed end funds tend to focus their investments into a specific type of security and provide investors an easy way to invest in that type of security. Popular CEF classes are municipal or tax-free bonds and stocks of specific foreign countries. CEFs are a way to invest in the markets of countries like Chile or Switzerland, which do not have associated mutual funds or ETFs. ETFs are for investors and traders who want a low-cost way to participate in the market, sectors of the market or specific commodities. The SPDR S&P 500 ETF will track the S&P 500 index without the necessity to buy 500 different stocks. The SPDR Gold Trust ETF allows investors to invest in the value of gold through their regular stock brokerage accounts.
- Each CEF has specific investment objectives and the fund managers actively trade securities to meet those objectives. CEFs are said to be actively managed. An ETF is constrained by the index in tracks to hold certain securities and does not deviate from the index components. Popular ETFs hold the same stocks as the major stock indexes like the S&P 500 or Dow Jones Industrial Average. Others track the value of commodities such as the price of gold and oil. ETFs are not actively managed.
- A share of either a CEF or ETF has two associated values. The net asset value or NAV is the total value of the assets in the fund divided by the number of shares. If the fund was liquidated this is the amount shareholders would receive for each share. The market price is what the shares are trading for on the stock exchange. This is the price you see if you look up the fund symbol on financial websites. ETFs and CEFs can trade at a premium or discount to the fund's NAV.
- ETFs and CEFs differ on how the shares are initially created. CEFs have an initial public offering where investors buy the shares when they are issued by the fund company. Once the shares are issued they can only be sold and bought on the stock exchanges. ETF shares are formed when a financial institution trades securities that match the ETF holdings to the ETF company in exchange for the ETF shares. ETF shares are created in blocks of 50,000 shares. The company that exchanged for the ETF shares will then release them to trade on the stock exchanges.
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