The vast majority of open-end mutual funds are priced once
daily after the close of the U.S. stock markets. A mutual
fund’s daily net asset value (NAV)—the dollar value of a
single share of each fund—is calculated by taking the total
assets, deducting liabilities and dividing by the number of
shares outstanding. Because they’re priced once per day,
all investors receive the same NAV when purchasing or
redeeming shares.
Similar to mutual funds, ETFs also determine a once daily
NAV at the market close using the same calculations. In
both cases, NAVs represent the real value of the underlying
securities of the ETF. But the similarities end here.
Like stocks, ETFs trade throughout the day via stock exchanges.
Fluctuations in the prices of shares of ETFs can and do occur
throughout the trading day. Consequently, two investors
purchasing shares of the same ETF on the same day may
have acquired (or sold) their shares at entirely different prices.
ETFs can also potentially sell at a premium or discount if
their market price exceeds or is below their underlying market
value. Market forces and the desire to make a transaction
usually help keep the bid/ask close to the NAV. The graphic
below gives examples of premiums and discounts for ETFs.
ETFs also feature another type of price—intraday indicative
value (IIV)—which is calculated every 15 seconds and
approximates the NAV of an ETF (which can differ from its
market value).
In contrast, mutual funds do not trade on stock exchanges
where market forces drive up or drag down share prices
throughout a day. Consequently in the open-end mutual
fund world discounts or premiums are nonexistent, as there
is a consistent NAV. Changes in the value of a mutual fund’s
underlying securities are reflected the following day in the
fund’s once daily, end-of-day NAV computation.
Unlike open-end mutual funds and ETFs, closed-end funds
don’t always calculate NAVs on a daily basis, although some
do. Moreover, because of their closed structure, under
which there are no direct share purchases and redemptions
(like ETFs have through the creation/redemption process),
closed-end funds may hold less liquid or thinly traded
securities. Closed-end funds do not need to stand ready to
redeem shares (as open-end mutual funds do). Redemptions
(and purchases) of shares are accomplished only via stock
exchange transactions.
Closed-End Funds: Persistent Discounts/Premiums
Due to their structure, closed-end funds often find that their
exchange traded share prices trade above or below their net
asset values. But unlike ETFs, which look to market makers to
closely align prices and tighten spreads, closed-end funds
often find themselves alone—trading at premiums or iscounts
for extended periods of time, or even their entire lives.
Closed-end fund premiums present few problems, as investors
are usually willing to “pay up” in order to own a hot or
popular closed-end fund whose share price has risen from demand. Persistent discounts, however, often ire investors
who feel cheated when their shares are worth less than the
closed-end fund’s cumulative portfolio value (i.e., NAV). In
some cases, double-digit discounts can persist.
In an effort to deal with the discount dilemma, a growing number
of closed-end funds have begun life with provisions allowing
the fund to structurally shift into an open-end fund, or in some
cases an ETF, if a sizeable discount persists for a long period.
For example, this automatic transformation might be triggered
if a closed-end fund trades at a 10% or greater discount for
a certain number of days during an 18-month period. Unlike
closed-end funds, ETFs don’t traditionally face lingering and
deep discounts because APs watch for pricing differences
and the opportunity to employ “arbitrage.” If the price of
the underlying securities of an ETF exceeds the exchange
traded price of the ETF (a discount scenario), an AP will purchase
shares of the ETF from the market, then exchange those
shares for shares of the underlying securities (a redemption
in-kind), which are then sold to the market. The reverse
would occur under a scenario where the ETF trades at a premium
to the NAV of its underlying securities.
* "Protecting Investors: A Half Century of Investment Company Regulation," May 1992 report from the SEC’s Division of Investment Management.
This information is subject to change at any time and should not be construed as a recommendation of any specific security
or strategy.
This information does not constitute tax advice. Please consult your tax advisor and/or state and local tax offices for more
complete information.
Securities are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks,
including the possible loss of the principal amount invested.
RydexShares™ are distributed by Rydex Distributors, Inc., an affiliate of Rydex Investments.
Rydex Investments 9601 Blackwell Road Suite 500 Rockville, MD 20850
800.820.0888 Send us your comments
For more complete information regarding Rydex funds, call 800.820.0888 or click here for a prospectus. Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. The fund's prospectus contains this and other information about the fund. Read the prospectus carefully before you invest or send money.
Liquidity refers to how quickly and easily a security, such as a stock or
bond, can be converted into cash
or a cash equivalent. Some securities
(such as large-cap stocks), which
trade often and in high volume
amounts, are more liquid than other
securities, which are not traded
often or in great volume (such as
certain micro-cap or foreign stocks
or private equities).
The term “thinly traded” is a
subjective term used to generally
describe a security that is not
highly liquid. There are no exact
parameters—such as precise numbers
of shares traded or how often
trades between buyers and sellers
are completed—for what constitutes
a thinly traded security.
A Word About Commissions
While open-end mutual funds
generally have a single net asset
value at which investors may
purchase or redeem shares on any
given day, keep in mind that mutual
fund share class variations and
applicable commission charges (if
any) impact the actual share price
at which funds can be bought or
redeemed.
For instance, retail investors purchasing
Class A-Shares of a fund
will likely acquire those shares at
a higher price because the fund’s
front-end commission charge will
have been added to that NAV.
Investors who own other funds
within a single complex, who invest
larger amounts and qualify for discounts,
who have opted for special
purchase programs, or who invest
in other share classes may qualify
for reduced or alternate commission
charges and, consequently,
may purchase (or redeem) shares
at an offering price that differs
from a fund’s NAV.
In contrast, ETFs, unlike mutual
funds, trade on a stock exchange
and are typically bought and sold
through a broker/dealer, discount
broker or other financial advisor
who may impose a transaction or
commission charge for each and
every purchase or sale of ETF shares.
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