In an effort to emphasize the importance and necessity of education when debating between exchange-traded funds versus closed end funds, TheStreet.com reports that investors often confuse the two, especially when it comes to investing in one country.
"Investors need to do the same degree of comparison shopping they would normally do when choosing between funds, which means digging into things like expense ratios, historical performance and holdings," says
Shares of closed-end funds can operate at premiums or discounts to their original net asset values, something that attracts many investors. ETFs trade freely on an exchange, but they usually track an index and aren't actively managed. The premiums and discounts have a tendency to being steep, and therefore specialists of the market try to keep ETF shares as close to the net asset value as possible.
Don Cassidy, fund strategist at Lipper says investors need to take long-term performance, leverage, and manager tenure into account when reviewing a closed end mutual fund, just as they would an open-ended one. He also recommends that short-term investors should use unmanaged index funds, like ETFs, because the costs are lower. ETFs are also more tax efficient and do not distribute capital gains like actively managed funds do.
