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The Alchemist - Mutual funds vs. CEFs and ETFs (01/28/2004)
By Al Thomas

Now that many mutual funds are adding more and larger redemption fees it is time to look elsewhere to invest your money.

We all know what mutual funds are, but what is a CEF or ETF? Basically a Closed End Fund also called an ETF or Exchange Traded Fund is just about the same thing as a standard open end mutual fund with a few minor exceptions. The CEFs, ETFs are also called Sector Funds and i-shares have a static group of stocks or bonds in the portfolio and carry a NAV, Net Asset Value, of the stocks at any particular moment. The value is computed moment by moment during the trading day and the investor can buy the fund based on the price at that time. However, many times there are discounts and premiums to that NAV so you might be paying more or less than what that bundle of stocks is worth. Mostly there are discounts.

Standard mutual funds are priced only at the end of the day whereas CEFs can be bought and sold at any time during the trading day just like regular stock and for the same commissions. CEFs have no additional loads other than regular commission and there are no redemption fees charged. You will want to buy and sell them with a discount broker that has a flat ticket charge of $7.00 to $15.00 no matter the number of shares traded.

Even with paying commissions the costs are very close to the same for standard and CEF/ETF funds.

As of this time there are about 500 CEFs with more being added. If you have a computer you can check out many of them on the Internet at http://finance.yahoo.com/etf/browser/mkt?ce=103 , http://www.etfconnect.com/ , http://www.icefi.com/icefi/tutorial/maj_diff.htm and http://thresholdtrading.com/members/etfs2.cfm

Because of their flexibility CEFs have appeal to aggressive short-term traders as well the Buy and Holders. One of the questions I have for current mutual fund managers is if the CEFs can make intraday computations why can't the standard mutual funds give a simple end-of-day computation if you want to buy today and sell tomorrow. Many funds such as Profunds, Rydex and Potomac do this. In fact, Rydex can be bought in the morning and sold in the afternoon as they have 2 settlement prices each day.

The real reason despite what fund managers tell you is they don't ever want you to sell. They get paid for the amount of money in the fund and not on their performance. Redemption fees are there to dissuade you from selling.

There is one drawback of which you must be aware. Many of these CEFs trade with very, very little volume. Do not put in market orders because your execution could be far off where the last price was quoted. Always enter price orders to buy at or near the ASK price. When selling make your offer near the BID price. Don't expect stops to be filled at your price.

As you learn more about CEFs/ETFs you might want to give them a try.

Copyright Albert W. Thomas All rights reserved. Author of "If It Doesn't Go Up, Don't Buy It!" www.mutualfundmagic comments to al@mutualfundmagic.com 


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