2 – L2 12 Shortcomings Of Mutual Funds V2

Recall that there are some shortcomings in Open-End and Closed-End Mutual funds. Open-End Mutual Funds may need to maintain parts of their assets under management in cash to let investors withdraw on any given day. This dilutes the funds overall performance. Also, Open-End Mutual Funds may limit the number of times that you can invest or withdraw within a certain time period, such as 90 days. Moreover, the price you get for withdrawing is based on the closing price at the end of that day, not the best price at the time that you initiate the transaction. Closed-End Mutual Funds addressed this by making their shares tradeable in the stock market. But the market value of these shares may diverge from the value of the funds portfolio. Is it possible to do better? Can we set up a fund that does not need to hold a reserve of cash and whose market value matches is portfolio? Yes we can. We can do better than mutual funds with ETFs. ETFs like mutual funds, allow us to invest in a portfolio of stocks. Thereby benefiting from diversification. Even better, ETFs shares can be traded on a stock exchange as if their stocks themselves. Plus, the market price of an ETF closely follows the value of the underlying portfolio. We’ll see why later in this lesson.

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