NASAA Series 66 Uniform Combined State Law ExaminationInvestment Vehicle CharacteristicsEasy
A client is interested in an investment vehicle that offers professional management, diversification, and the ability to redeem shares at the net asset value (NAV) at any time. However, they are concerned about potential sales charges. Which of the following investment vehicles best fits this description?
- AClosed-End Fund
- BExchange-Traded Fund (ETF)
- COpen-End Mutual Fund
- DUnit Investment Trust (UIT)
Show answer & explanationAnswer & explanation
Correct answer: C. Open-End Mutual Fund
Open-end mutual funds are professionally managed, diversified, and allow investors to redeem shares at NAV, though they often involve sales charges. ETFs trade on exchanges and their prices fluctuate throughout the day, while closed-end funds trade on exchanges and their prices can deviate from NAV. UITs are fixed portfolios with a termination date.
Why the other options are wrong
- A. Closed-end funds trade on exchanges like stocks, and their market price can be above or below their NAV.
- B. ETFs trade on exchanges and can be bought and sold throughout the day at market prices, which may differ from NAV.
- D. UITs have a fixed portfolio and a specified termination date, which does not align with the 'redeem at NAV at any time' characteristic.
Open-End Mutual Fund
An investment vehicle that pools money from many investors to purchase securities, managed by a professional fund manager, allows shares to be bought and sold directly from the fund at the end-of-day Net Asset Value (NAV).
- Continuously offered and redeemed by the fund.
- Shares bought and sold at NAV.
- May have sales charges (loads) or 12b-1 fees.
- Offers diversification and professional management.
Memory trick: Many investors pool their cash, professional management takes the task, NAV redemption is the fund's ask.