Exchange traded funds (ETFs) have a few similarities and differences from their Wall Street cousins, the closed-end fund (CEF).
Both ETFs and CEFs are baskets of securities that trade throughout the day on an exchange. But where they differ is that a closed-end fund sells a fixed number of shares that can change hands on an exchange. Its price is affected by demand for its shares and can drift from its net asset value (NAV), reports The Wall Street Bully. An investor who buys a CEF close to its NAV could sell at a price well above or below the value of the fund’s holdings.
Information from The Wall Street Journal also points out that an ETF is a large basket of securities and that investors can assemble a basket of stocks that mimics the ETF’s portfolio and use this basket to buy big blocks of ETF shares. Bigger investors can swap ETF shares for underlying securities causing the ETF’s market price to stay close to its NAV.
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