Exchange-Traded Funds (ETF)

PrepNuggets

ETFs are closed-end funds where the shares are issued in the primary market, and traded in secondary markets.  Unlike closed-end mutual funds, their market price is actually quite close to the net asset value of the portfolio.  This is because ETFs have special provisions that allow some authorised participants to convert their shares into individual portfolio securities when the price is significantly below NAV, or exchange of portfolio shares for ETF shares when the price is significantly above NAV.    Such activities help to keep the market price of the ETF close to the NAV per share of the portfolio.  

ETFs trade like shares in the market, so ETFs can be sold short, purchased on margin, and traded at intraday prices based on the market, whereas open-end funds are typically sold and redeemed only daily, based on the share NAV calculated with closing asset prices. 

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