The Savvy Investor's Guide to Pooled Investments by H. Kent Baker

The Savvy Investor's Guide to Pooled Investments by H. Kent Baker

Author:H. Kent Baker
Language: eng
Format: epub
ISBN: 9781789732153
Publisher: Emerald Publishing Limited
Published: 2018-12-23T16:00:00+00:00


Most experts advise against buying a CEF at its IPO, since it is likely to be trading close to NAV when it first trades, but at a significant discount to NAV later on.

Elvis Picardo

Here are some major differences between CEFs and ETFs.

Transparency. Since most ETFs track a particular index in the same manner as the index is constructed, they have a high level of transparency in terms of holdings and strategy. Thus, you only need to review the holdings of the particular index to determine what securities your ETF holds. In contrast, CEF holdings of underlying securities are less transparent because they are actively managed and traded more frequently. This feature is the primary difference distinguishing ETFs from CEFs.

Expenses. ETFs are usually passively managed and created to track the performance of a specific index such as the S&P 500 index. An ETF manager buys shares of the securities to replicate the holding of the tracked index. No changes occur unless companies are added or removed from the underlying index. The expense ratios assessed on ETFs are often much lower than on CEFs, which are typically actively managed, resulting in higher trading costs. CEF fund managers frequently focus on specific industries, sectors, or geographic regions. Expenses for CEFs include costs for trading activity associated with an active management style.

Pricing. ETFs and CEFs differ in how they are priced and sold to investors. Although the NAV serves as the basis for pricing both, an ETF sells at a price near the NAV of the benchmarked index, or the underlying securities held within the fund. By contrast, a CEF can trade at a discount or a premium to its NAV based on the demand from investors. If the market for a CEF has more buyers than sellers, the CEF generally sells at a premium. If the market has more sellers than buyers for a CEF, the CEF normally sells at a discount. Shareholders typically want to buy a CEF when it’s trading at a discount.

Paul Katzeff



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