NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsMedium
A financial advisor is explaining the characteristics of a closed-end fund to a new client. Which of the following statements correctly describes a characteristic of a closed-end fund?
- AThey typically have a fixed number of shares that fluctuates daily with investor demand.
- BThey are continuously offered and redeemed at Net Asset Value (NAV).
- CTheir shares trade on exchanges and their price can deviate from NAV.
- DThey are always passively managed and track an index.
Show answer & explanationAnswer & explanation
Correct answer: C. Their shares trade on exchanges and their price can deviate from NAV.
Closed-end funds issue a fixed number of shares during an initial public offering (IPO), and these shares then trade on stock exchanges. Unlike open-end mutual funds, their market price is determined by supply and demand, and can therefore trade at a premium or discount to their Net Asset Value (NAV).
Why the other options are wrong
- A. While they have a fixed number of shares, this number does not fluctuate daily with investor demand; it's set at the IPO. Open-end funds' shares fluctuate daily.
- B. This describes an open-end mutual fund, not a closed-end fund.
- D. Closed-end funds can be either actively or passively managed, similar to mutual funds. This is not a distinguishing characteristic.
Closed-End Fund
A type of investment company that issues a fixed number of shares through an IPO. These shares then trade on secondary markets (stock exchanges), and their market price can differ from their Net Asset Value (NAV).
- Fixed number of shares, not continuously offered.
- Market price determined by supply and demand, can trade at premium/discount to NAV.
- High liquidity due to exchange trading.
Memory trick: Open funds flow, closed funds trade.