In E.T.F., large shares are created and traded as well.
In ETF investor can invest or exchange the multiple funds into single fund there they dont required investment manager to manage the fund
So far we looked at open end mutual fund
that can kind of grow and shrink depending on how many investors
want to invest in that fund and they can grow by creating new shares
and selling those shares to general public
and they can shrink because someone who wants their money back
goes to the fund and said
“you have to buy this back from me
at the NAV (net asset value) per share.”
But the problem with this actually there’s a couple 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.”
And the other thing that they have to worry about
or at least from the investor point of view is
they can only buy or sell at the end of the day
and that will only happen onnet asset value per share
and on top of that the fund manager or whoever is running
the fund has to worry about all of these actually transacting between
all of these different investors. On the other side of
thing we look at the closed end funds, the closed end funds
couldn’t kind of dynamically grow and shrink by creating
new shares or by buying them back but what
was good about them is that they are freely trading on exchanges
may be on the NASDAQ or New York stock exchange.
And because there was non of this kind of back and forth
between the fund managers or whoever was a kind of doing
the operations of the fund and the investors, they didn’t
have to put cash aside or they didn’t have to have
kind of all of the overhead in dealing with the investors.
Now, you’re probably saying “well, isn’t there a way
or maybe there’s a way to get the best of both worlds of fund
that could grow dynamically, that could create new shares
when there was demand from investors.
But in the same time, those new shares could be
traded on an open market and that combination
or you can kind of view it as the combination
of the due actually exist and they’re called Exchange Traded Funds.
Exchange Traded Funds. or ETF for short.
And you might say “Hey wait, isn’t a Closed End Funds Exchange Traded?”
And it is. These actually do exchange trade hand
on the stock exchanges, but these aren’t officially ETF.
So someone told you an ETF, the way to think about it is a combination of both.
But what it does is, it limits the interactions.
So when you have this regular open end mutual fund,
any individual investors can come to the fund and say
“Here is my share, buy it back from me,” eliminate that share.
That creates a lot of ever head here.
On an Exchange Traded Funds, only approved people only and these are usually large institutions
can go to the fund and say “I want to buy or redeem a big block of shares.”
So an Exchanged Traded Funds instead of creating one share at a time,
it might create 5,000 or 10,000 or 100,000 shares at a time.
And on the other side of a thing, if someone wants to redeem their shares,
they would redeem 5,000, 10,000, or 100,000 shares at the same time.
And what’s good there from the funds point of view is that
they don’t have to deal with all of these small transactions,
they can do big transactions with big entities so that saves
them cost on over head. And since these big people
are going kind of buy these big blocks of shares, they can go and sell them
in an open market, they can trade them in the open market.
So if you want to buy into the ETF instead of buy it directly from the ETF,
you would buy it from one of these big institutions that buy big blocks of shares.
So they’re now buying, you know a big block of, you know
may be a 10,000 shares right over here and will trade in the open market.
So you kind of get the best of both worlds.
And in general, ETF also have lower fees.
They have lower fee, one because they don’t have to do all this back and forth
between each individual investors and most ETFs are not actively
managed and when I say “actively managed,”
I’m talking about the situation where you had Pete, and Pete said
“He’s just an awesome stock figure, he can beat the market,
He can you know, do all of you know.
He really researched his company and he thinks that
there are some values that he creates by doing that.
When something is not actively managed, and Exchanged Traded Funds
tend to not be there, saying
“Look, we’re just gonna buy the market or we’re just gonna buy some commodity.”
So when you go into the Exchanged Trade Funds,
you’re really just trying to buy some assets classes,
maybe it’s the SNP500, maybe some types of Exchanged
Traded Funds that buys gold assets or maybe it’s buying some other type of commodity.
And so because it’s not actively managed,
the argument would be that they don’t do as much as managing fees.
So they will have lower fees.
They will have lower fees.
So the combination, they can go arbitrary large,
and some of the largest Exchanged Traded funds are super huge.
They have much lower fees and they have this tradability,
you can trade them at any kind of second on the market,
Log in to save your progress and obtain a certificate in Alison’s free Financial Funds online course
Sign up to save your progress and obtain a certificate in Alison’s free Financial Funds online course
Please enter you email address and we will mail you a link to reset your password.