There is some confusion over the term exchange-traded fund, usually abbreviated to ETF. Financial professionals tend to include only index-linked securities in this category, such as the iUnits from Barclays Global Investors. These are passively-managed funds that track the results of a major market index or a specialized sub-index, such as Energy or Gold.
However, there is a wide range of actively-managed portfolio funds that also trade on stock exchanges in Canada and the U.S. These are generically referred to as “closed-end funds” and there is actually a Closed-End Fund Association based in Kansas City that represents the U.S. industry. Its leaders are very unhappy with the “closed-end fund” tag that has been hung on them, especially in the light of the high profile that index-linked ETFs have achieved, and are searching for an alternative.
There are compelling reasons to make a change. The closed-end fund designation suggests an old-fashioned product that usually trades at a deep discount to net asset value. ETFs, by contrast, are seen as new and “in”. In fact, many closed-end funds are also relatively new, have first-rate managers, and are posting some excellent rurns to go with their attractive MERs. They just need a new image.
When you think about it, the term exchange-traded fund should be used for all portfolio-based securities that trade on a stock exchange. There is nothing in the name that limits it to index-based products. Index securities could be designated as exchange-traded index funds (ETIFs) to highlight their distinctive character.
For now, however, if an index-based security is what you want, check out ETFs. For actively-managed portfolios, the closed-end fund moniker still applies.
Adapted from an article that originally appeared in Mutual Funds Update.