what's the difference beween an ETF (exchange-traded fund) and a closed-end mutual fund?

ETFs are open-ended -- an authorized participant can synthesize more fund assets by generating more creation units. Closed-end funds are traded on an exchange, but have a fixed number of shared created by the original fund company. The potential for synthesizing creation units means that ETFs will trade much closer to the value of their underlying components because the authorized participant can readily resolve a supply/demand imbalance by creating or redeeming units of the ETF.

QuoteOriginally posted by: Traden4AlphaETFs are open-ended -- an authorized participant can synthesize more fund assets by generating more creation units. Closed-end funds are traded on an exchange, but have a fixed number of shared created by the original fund company. So an etf is essentially an open-ended mutual fund that also trades in the market. Would barclays be the only "authorized participant" who can synthesize new i-shares, or are there competing authorized participants?

QuoteOriginally posted by: KackToodlesSo an etf is essentially an open-ended mutual fund that also trades in the market. Would barclays be the only "authorized participant" who can synthesize new i-shares, or are there competing authorized participants?The ETF prospectus should list the authorized participants. These participants compete against eachother for arbitrage profits - a mechanism that eliminates the ETF share price's premium/discount to Net Asset Value. One thing to note is that, in order for this sort of arbitrage to go on, the authorized participants must know the ETF Net Asset Value in real-time. This restricts ETF products to being transparent, indexed portfolios. In other words an ETF cannot usually be actively managed by a portfolio manager because the portfolio composition must remain fixed in order to facilitate arbitrage activities. Closed-End Funds, on the other hand, are usually marketed as actively managed products, which allows CEF managers to charge higher fees but which also causes the CEF share price to deviate wildly from the NAV. Some Closed-End Funds have a mechanism which allows you to occasionally deliver CEF shares and recieve cash based on NAV or a pro rata share of the actual CEF portfolio holdings; this kind of mechanism is somewhat helpful in eliminating CEF share prices that are at a discount to NAV, but it is not a true arbitrage mechanism and it does not address the problem of CEFs trading at significant premiums to NAV.ETFs are often used by professionals for hedging or for global macro speculation. Short selling ETFs is easier because they are exempt from the down-tick rule. CEFs are only used by professionals for very risky "arbitrage-like" trades. CEFs are usually only traded and held by retail investors. For example, no professional would ever participate in a CEF IPO because he would have to pay $10.00 per unit for a portfolio that has a market value of only $9.50 after the investment bankers have taken their 5% underwriting fee (not to mention the management fees that the CEF manager will charge on top of that every year). Only a misinformed investor would participate in such an IPO. The CEF industry is a rather unethical scheme with the sole purpose of earning fees and commissions for asset managers, investment bankers and financial advisors, all at the expense of retail advisors who are deliberately misadvised by their banks. It's a widows and orphans sort of thing.

QuoteOriginally posted by: Panninino professional would ever participate in a CEF IPO because he would have to pay $10.00 per unit for a portfolio that has a market value of only $9.50 after the investment bankers have taken their 5% underwriting fee (not to mention the management fees that the CEF manager will charge on top of that every year). Only a misinformed investor would participate in such an IPO. The CEF industry is a rather unethical scheme with the sole purpose of earning fees and commissions for asset managers, investment bankers and financial advisors, all at the expense of retail advisors who are deliberately misadvised by their banks. It's a widows and orphans sort of thing. Really? Then there must be millions of stupid investors because there are hundreds of CEFs around with millions of investors holding them. You also complain about the overhead/maintenance fees. But, you know. ETFs also have their share of fees and I'm sure the kind professionals who create and maintain the ETFs are quite handsomely paid, don't you think? Where do you think their compensation come from?

cost efficiency and volume