Hey Guys, I should really reread the text, however… From what i gather is that a CEF is similar to ETF, i’m i correct in saying this? A) Both traded on a exchange B) Trade though out the day C) Diversified pool of assets D) Can be have derivatives Thanks
ok, ive found the main difference… In contrast, the market price of an ETF trades in a narrow range very close to its net asset value, because the structure of ETFs allows major market participants to redeem shares of an ETF for a “basket” of the fund’s underlying assets. This feature could lead to potential arbitrage profits if the market price of the ETF were to diverge substantially from its NAV. The market prices of closed-end funds are often ten to twenty percent higher or lower than their NAVs, while the value of an ETF would only very rarely differ from its NAV by more than one-fifth of a percent. right but what do they mean with “because the structure of ETFs allows major market participants to redeem shares of an ETF for a “basket” of the fund’s underlying assets” Could some one please elaborate? Many thanks.
Please correct me if I am wrong. If you are a specialist (dealer). You act as an intermediary between the fund and investors. You stand ready to create or redeem shares. So let’s say there is a lot of demand for an ETF. What a market participant can do is buy the underlying assets of the ETF from the capital markets and give them to the fund in exchange for ETF units which are then sold to investors. If there are a lot of investors who want to sell shares, the specialist stands ready to purchase shares from the investors, “redeem” them through the ETF in exchange for the “basket” of the fund’s underlying assets and then sell the assets in the capital markets to receive money. The specialist ensures that ETF underlying value doesn’t deviate largely from NAV because of arbitrage opportunity (difference pricing between value of the ETF shares and the basket of assets it represents) Note the shares get transferred “in-kind” rather than a mutual fund having to sell assets in its portfolio to raise cash to distribute to investors in redemptions. This is an advantage of an ETF: in kind transfers don’t trigger capital gains tax.