F123. Closed-End Funds & Exchange-Traded Funds

Federal Reserve definition for F123 flow of funds table

Closed-end Funds

Closed-end funds, also called publicly traded funds, are investment companies that, like mutual funds, purchase various kinds of financial assets in order to achieve a specific objective, such as long-term growth.

Closed-end funds have a long history , and several funds currently operating have been around since the 1920s.

At the end of 1997, there were about 500 in operation.

Unlike mutual funds, closed-end funds generally do not issue additional shares after the initial public offering and are not required by law to redeem outstanding shares.

Shares of closed-end funds are traded in the market along with corporate equities at prices determined by the market; shares that trade at a price above the net asset value are said to be trading at a premium, and those that trade at a price below net asset value, at a discount.

Exchange-Traded Funds

Exchange-traded funds are a basket of securities that are traded on the exchange in standardized units. Usually ETFs are designed to perform in a way similar to specific security price indices.

ETFs are investment companies registered under the Investment Company Act of 1940 as open-end funds or unit investment trusts. ETFs do not sell or redeem individual shares at net asset value, but only in large blocks (such as 50,000 shares).

The individual (non-redeemable) shares are traded on the securities exchanges, like closed-end funds.

Since large blocks are redeemable, the arbitrage between net asset value and market value keeps market prices more closely aligned to net asset value than closed-end funds

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