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.