Which of the following investment products is most likely to trade at their NAV per share?
A. ETF
B. Open-end mutual funds
C. Close-end mutual funds
The correct answer is B.
The CFAI Equity Section states that ETF is traded like a closed-end fund, but NAV is not discounted (which is close to the underlying asset). Thus, we can cross out C.
However, I am really confused with the answer since the CFAI book states “In practice, the market price of the ETF is likely to be close to the NAV of the underlying investment”. Thus, can someone explain why the correct answer is not A? Given the fact that ETF is more transparent than both open and closed-end funds (since ETF’s NAV is updated daily).
Think you’ve already answered your own question by saying “ETF is traded like a close-end fund” and then crossing out C.
With open ended funds - think pension funds.
As people pay into their pensions these funds go out and buy more assets with the cash received. This prevents the fund trading at a premium or discount to its NAV which is a pretty reasonable expectation given people will pay into their pensions every month.
Assets are sold as people draw down on the fund which is why you’ll sometimes hear about funds becoming ‘suspended’ because assets can’t be sold quick enough to meet the client demand - think property funds.
With an ETF/Closed-end fund the fund will simply trade at a discount to its NAV if enough people sell their holdings in a short period of time.
Hmmm after the “ETF is traded like a closed-end fund” sentence, it also states “but NAV is not discounted, which means it is close to the underlying asset”. So I focused on the second part since the question is asking “which is most likely to trade at their NAV”… So technically, ETF and open-end mutual funds are both traded at their NAV per share right?
I get where you are coming from but just because an ETF is currently trading at its NAV, doesn’t mean it will always trade at its NAV. An open ended fund cannot drift from its NAV. With this in mind open ended is most likely to to trade at its NAV
Ah I see. So can I understand it this way:
-An open-ended fund cannot drift away from NAV.
-Most of the time ETF is trading at its NAV.
-Most of the time close-ended fund is trading either at a discount/premium.
But ETF has the highest transparency?
I am going to take the level 1 exam so I am not sure if all of these concepts are necessary for us to grasp 
Yeah that’s a fair summary. ETFs usually have the greatest transparency because they just buy index constituents where as close-ended funds keep their holdings data pretty close to their chest - they basically don’t want everyone know their asset allocations to protect their “edge”
Great! Thank you so much! I wish the CFA Curriculum have such an easy explanation and summary…
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