Explanation:
C is correct. Since closed-end mutual funds and ETFs are publicly traded they do not need to keep liquid assets on hand to meet redemptions. Open-end mutual funds, on the other hand, retire shares as they are liquidated so they need to keep liquid assets on hand to meet redemptions.
A is incorrect. The number of shares in open-end mutual funds expands or contracts as investors want to buy or sell shares. The number of shares in a closed-end fund is constant, barring any secondary offerings. The number of shares in an ETF fluctuates as blocks of shares are deposited or withdrawn.
B is incorrect. Open-end mutual funds can only be traded when the NAV is set once per day. Closed-end mutual funds and ETFs can be traded whenever the market is open.
D is incorrect. Open-end mutual funds and ETFs typically trade at or very near to their net asset value while closed-end mutual funds typically trade at prices lower than their net asset value.
Learning Objective: Differentiate among open-end mutual funds, closed-end mutual funds and exchange-traded funds (ETFs).
Reference: Global Association of Risk Professionals, Financial Markets and Products (New York, NY: Pearson, 2023). Chapter 3. Fund Management
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Q-92. An equity analyst on a trading desk at an investment bank is comparing different investment vehicles. The analyst studies the characteristics of open-end mutual funds, closed-end mutual funds, and ETFs. Which of the following is a correct comparison of these investment vehicles?
A
The number of shares in open-end and closed-end mutual funds remains constant over time, while the number of shares in an ETF fluctuates.
B
Trades in open-end and closed-end mutual funds are executed once a day at the net asset value, while ETFs can be traded at the market price any time the market is open.
C
Open-end mutual funds need to hold some liquid assets to meet redemptions, while closed-end mutual funds and ETFs do not need to hold any liquid assets on hand.
D
Open-end and closed-end mutual funds typically trade at or very close to their net asset values, while ETFs typically trade at prices lower than their net asset value.
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