What is an ETF? Part 3 of 3 (video)
Summary of video: What is an ETF Mutual Fund? Key points about an ETF from this video: Has slightly less overhead than an open-ended mutual fund Can dynamically grow and shrink Can have very low annual expenses (expense ratio) Most ETFs are not actively managed Link to first video: What is an ETF? Part 1: Open Ended Mutual Funds Link to last video: What is an ETF? Part 2: Closed Ended Mutual Funds Transcript of What is an ETF? Part 3: Exchange Traded Funds So far we looked at open-end mutual funds that can grow and shrink depending on how many investors want to invest in that fund. They can grow by creating new shares and selling those shares to the general public, and they can shrink because someone who wants their money back goes to the fund and says, “You have to by this back from me at the NAV, at the net asset value per share.” The problem with it, actually there’s a couple of problems, is that the manager here has to always keep a little cash set aside in case some of the investors come to him and say, “Hey, I want you to buy my share back. I want liquidity.” The other thing that they have to worry about, or at least from the investor’s point of view, is they can only buy or sell at the end of the day, and that will only happen at the net asset value per share. On top of that, the fund manager or whoever’s running the fund has to worry about actually transacting between all of these different investors. Now on the other side of things we looked at the closed-end fund. The closed-end fund couldn’t dynamically grow and shrink by creating new shares or by buying them back, but what was good about them is, is that they were freely trading on exchanges, maybe on the NASDAQ or the New York Stock Exchange. Because there was none of this back and forth between the fund managers or whoever was doing the operations of the fund and the investors, they didn’t have to put cash aside and they didn’t have to have all of this overhead in dealing with the investors. Now you’re probably saying, “Isn’t there a way or maybe there’s a way to get the best of both worlds, a fund that could grow dynamically, that could create new shares when there was demand from investors, but at the same time those new shares could be traded on an open market?” That combination, or you can view it as a combination of the two, actually exists, and they’re called exchange-traded funds, exchange-traded funds, or ETFs for short. You might say “Hey wait, isn’t a closed-end fund exchange-traded?” It is. These actually do trade hands on the stock exchanges, but these aren’t officially ETFs. When someone tells you an ETF the way to think about it is a combination of both. What it does is it […]
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