Tahoe-Truckee Market Beat: Different types of mutual funds
Mutual funds have been around for a very long time. According to Investopedia, the first mutual fund type investment vehicle was created in the Netherlands in 1774. The first one in the United States appeared in the 1890s, and they became very popular in the 1980s and 1990s.
The first funds in the US were closed end funds which means that the fund has a set number of shares. A closed end fund will have an NAV, net asset value, and the shares will trade at either a discount or premium to the fund’s NAV. Shares of closed end funds trade like stocks on an exchange.
The first modern type open end mutual fund in the United States was the Massachusetts’s Investor’s Trust, which was started in 1924 and became available to the public in 1928. An open end fund will issue more shares as investors purchase them. Open end funds are priced and only available to trade once a day.
By the time the stock market crash of 1929 happened, there were almost 700 closed end funds trading and 19 open end funds. Many of the closed end funds used some form of leverage to try to get better returns and many ceased to exist after the crash. The small open end funds managed to survive. Today there are more than 10,000 different mutual funds.
ETFs or exchange trade funds started in the mid 1990s and have become increasingly popular today. The first ETFs where the Diamond and the Spyder, which track the Dow Jones Industrial Average and the S&P 500 index respectively.
Today there is more than $2 trillion invested in exchange traded funds. Now there are more than 1,500 ETFs and new ones are being created all the time.
One advantage to ETFs is the cost — they typically have lower management fees, and another is that if you wish to invest in one, the trade can be done on an exchange throughout the trading day.
A type of fund that is similar to the ETF is the ETN, which stands for exchange trade note. An ETN trades like and ETF on an exchange throughout the day, but is different in that it is backed by the company that issues it, so it is important to check out the credit of the issuer if you’re considering an ETN.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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