Actuarial news and views from Cape Town and beyond

The Difference Between Close-Ended Funds and Exchange Traded Funds

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On the face of it, these two forms of investment sound very similar. For instance, they both follow an investment style, shares in the fund are both tradeable on the secondary market and there are generally no limits on the amount of leverage that they can take on.

However the key differences lie in the following factors:

  • Fees: Exchange Traded Funds generally have lower fees than Close-ended Funds. This is because they are generally indexed (i.e track an underlying index) and therefore are not actively managed. This means lower fees paid to the investment manager (due to them not needing to be compensated for “skill”) and less money spent on turnover (through transaction costs).
  • NAV and Fund Transparency: Exchange traded funds tend to have more transparent funds and therefore trade much closer to Net Asset Value. Due to the transparency, exact underlying assets in the fund are known and large institutions, known as sponsors, often operate in the secondary and primary market to take advantage of arbitrage opportunities which present themselves when the share trades at a premium or discount to NAV. This works to keep prices in line with NAV. CEF’s don’t have the benefit that comes with such transparency.

The full list of differences can be perused at the following link. Difference between ETF’s and CEF’s.


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