The details behind mutual fund acronyms -- from ETF on down --
may not seem very important, but it is always beneficial to know
a little more about where you are investing your hard-earned
dollars. Can you spot the difference between Exchange Traded
Funds (ETFs), Exchange Traded Notes (ETNs) and Closed-End Funds
(CEFs), not to mention ETPs, ETVs and so on?
Let's start with the
Closed End Fund (CEF)
. A closed-end fund is simply a mutual fund that is issued with a
fixed number of shares that trades on an exchange. Once issued, a
CEF can not accept any new capital. This is in contrast to
open-end funds, what we all commonly refer to as a traditional
"mutual fund."
An open-ended
mutual fund
can accept unlimited amounts of capital and therefore issue
unlimited numbers of shares. They do not trade on an exchange and
generally can only be bought and sold once per day, after the
close. The share price is valued based upon the closing prices of
the positions held and the transactions are executed at that
value (net asset value or
NAV
) excluding sales charges or other fees.
The most common type of CEF is the
Exchange-Traded Fund, or ETF
. An ETF is a security that tracks an index, a commodity or a
basket of assets like stocks or bonds. Shares trade on an
exchange like a stock and can be bought and sold throughout the
day. The security does not usually trade at NAV but more commonly
at a premium (greater than) or a discount (less than) the value
of its holdings because the number of shares is fixed. Greater or
lesser demand creates the disparity between NAV and current share
price.
An
ETN
is very much like an ETF except that is designed to apply the
benefits of an ETF structure to bonds. ETNs are traded like
ETFs; however, the security is issued with a maturity date. This
is critical information because it introduces another element of
risk.
When buying an ETN, you must consider the credit-worthiness of
the issuer. If you hold an ETN to maturity, you will get the
principal paid back to you -- unless of course the issuer has
defaulted on it debt obligations. Similarly, a downgrade in
credit rating would decrease the market value of the
security.
There are other acronyms including those I referenced earlier:
ETV (Exchange Traded Vehicle)
and
ETP (Exchange Traded Product)
are two. ETP is somewhat of an umbrella term that includes ETFs
while an ETV is a security that provides investors with exposure
to commodities without trading futures or taking physical
delivery. Both are difficult to differentiate from an ETF and it
is largely unnecessary to do so.
The bottom line is to know what you are buying. Spend a minute
or two at the fund issuer's website and read the description of
the security and understand its structure. ETN owners that don't
know the security will mature because they thought they were
buying an ETF will be very surprised when it does mature.
Make that mistake once and you won't do it again. But there's
no need for you to make the same mistake at all.