NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
A client is interested in an investment that provides professional management, diversification, and liquidity, but wants to avoid the daily pricing fluctuations of open-end mutual funds. Which of the following investment vehicles would be most suitable?
- AOpen-end mutual fund.
- BExchange-Traded Fund (ETF).
- CClosed-end mutual fund.
- DUnit Investment Trust (UIT).
Show answer & explanationAnswer & explanation
Correct answer: C. Closed-end mutual fund.
A closed-end mutual fund is professionally managed and offers diversification. Unlike open-end funds, it trades on an exchange like a stock, meaning its price fluctuates throughout the day based on supply and demand, often trading at a premium or discount to its NAV. This avoids the single end-of-day pricing of open-end funds while still providing liquidity and professional management.
Why the other options are wrong
- A. Open-end mutual funds are priced once daily at NAV, which the client wants to avoid.
- B. ETFs trade throughout the day, but their price often tracks an underlying index very closely, which might not be the specific 'avoid daily pricing fluctuations' nuance the question implies. Closed-end funds have more pronounced daily price fluctuations relative to NAV.
- D. UITs are unmanaged portfolios that are generally not actively traded after initial offering, and their pricing is not the same as actively traded funds.
Closed-End Mutual Fund
A professionally managed investment company that issues a fixed number of shares through an initial public offering (IPO), which then trade on stock exchanges like individual stocks.
- Shares trade on exchanges throughout the day.
- Price determined by supply/demand, may differ from NAV.
- Offers diversification and professional management.
- Fixed number of shares; no new shares issued after IPO.
Memory trick: Closed-end funds: The stock market's managed friend.