NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesHard
A client is interested in an investment that provides professional management, diversification, and trades on an exchange throughout the day like a stock. They also prefer an investment vehicle where the share price is determined by supply and demand in the secondary market, rather than directly by the net asset value (NAV) at the end of the day. Which type of fund fits this description?
- AAn open-end mutual fund
- BA unit investment trust (UIT)
- CAn exchange-traded fund (ETF)
- DA closed-end fund
Show answer & explanationAnswer & explanation
Correct answer: D. A closed-end fund
Closed-end funds are professionally managed and diversified, and they trade on exchanges throughout the day. Their share price is determined by secondary market supply and demand, which can lead to them trading at a premium or discount to their NAV, unlike open-end funds or ETFs which typically track NAV more closely.
Why the other options are wrong
- A. Open-end mutual funds are priced once daily at NAV and do not trade throughout the day on an exchange.
- B. Unit investment trusts (UITs) are passively managed, have a fixed portfolio, and are not actively traded on an exchange with prices fluctuating based on supply/demand.
- C. While ETFs trade on exchanges throughout the day, their market price generally tracks their NAV very closely due to the creation/redemption mechanism, which is distinct from a closed-end fund's pricing dynamics.
Closed-End Fund
A type of investment company that issues a fixed number of shares that trade on a stock exchange. Its market price is determined by supply and demand, often trading at a premium or discount to its net asset value (NAV).
- Professionally managed and diversified.
- Trades like a stock on an exchange throughout the day.
- Fixed number of shares (no continuous creation/redemption).
- Market price can deviate significantly from NAV.
Memory trick: Closed-end, a fixed share count, trades like a stock, its price will bounce.