Many Business professionals would be shocked to find out that a basic Exchange Traded Fund on the NASDAQ, New York Stock Exchange or on Japans 225 funds that make up the Nekkei Index are all either UIT’s or Open-Ended Funds (Mutual Funds). This article’s purpose is meant to identify and educate more executive business leaders about ETF’s you likely see daily listed on TV or on the many Stock exchanges.
Before we are able to begin listing the different key components that make a Exchange Traded Fund. It’s a good idea if I share some basics to help you understand the ETF’s are complex Financial Vehicles. And for today’s article we will be touching on UIT’s, and Open-Ended Funds. Because that is what the majority of ETF’s are! Unit Investment Trusts and Open-Ended Funds. Interesting stuff right? Lets breakdown the basics of UIT’s and Open-Ended Funds.
Unit Investment Trust “UIT”
What is a Unit Investment Trust? Great question! According to FINRA‘s Website:
“Unit investment trusts, or UITs, fall in the same category as mutual funds and closed-end funds. All three are investment companies, which means they pool money from many investors and invest it based on specific investment goals. The key difference with UITs, however, is once a UIT sets its portfolio, it remains the same for the life of the fund (barring any major corporate events, such as a merger or bankruptcy proceeding) and the term is fixed.”
Investment Company Act of 1940
The key to understanding ETF’s is the fact all ETF’s are Investment companies. If I share more descriptively. A ETF is a Pool of Money that has been legally established as an Investment Company. Now we need to dive slightly deeper into what is “The Investment Company Act of 1940?” The S.E.C. Securities and Exchange Commission. The S.E.C. states on it’s website :
Additionally The Act was signed in to law by President Franklin D. Rosevelt who felt the need for Regulation after the Stock Market Crash of 1929 destroyed so many and especially after the Great Depression left its mark on America’s tattered Finances. The biggest thing I would like to leave you with to know and recognize about the Investment Company Act of 1940 is the fact this Law is a regulatory framework for retail investment products and vehicles. Most importantly the Act leaves Fund Managers and Financiers with three categories of Investment Companies to make offerings. These Company categories are “Unit Investment Trusts” UIT’s, (Mutual Funds) Open-Ended Management Investment Funds and Closed Ended Management Investment Funds. It’s very important to discern the Requirements for Investment Companies are based on their categorization and offerings of Investment products or vehicles.
Open-Ended Management Investment Fund
All a Open-Ended Management Investment Fund really is in most cases is a Mutual Fund! It’s very simple. A collection of Securities or Investments organized into a Pooled Investment Vehicle as a Investment Company. Here are some facts about Mutual Funds. An Open-Ended Fund continuously makes new Shares available to the Public for purchase. These funds are professionally managed and often are able to negotiate and procure Investment vehicles at a discounted price that is not available to Retail Investors. Most Retirement Funds and Retirement Accounts prefer the ease and efficiency of Mutual Funds for Investment Vehicles. Open-Ended Funds can be Growth Oriented, or even Mixed with Alternative investments used as Products inside the Fund. And this is why they make a excellent vehicle for Exchange Traded Funds.
Exchange Traded Funds
By now I think your catching on to the fact Exchange Traded Funds can take many forms or basically be a Investment Company formed into one of three categories Unit Investment Trusts, Open-Ended Funds, Closed Ended-Funds. It is remarkable that when you breakdown the basics of “What a ETF is?” you find that most Exchange Traded Funds are a unmanaged UIT or a Mutual Fund. I do hope you learned some things reading this week’s article. And in conclusion stay tuned! I feel it’s only fair for me to revisit expand on Closed-Ended Investment Management Companies in the near future. But for today? After doing some heavy studying. I felt it was really interesting to write about the fact that 70% of the ETF’s in the OTC and Big Blue Chip Markets? Are UIT’s and Open-Ended Funds are just Mutual Funds. I hope you found this article interesting and educational. This was something I felt could be useful and I felt it would make for a great little article. In conclusion. I would say, stay tuned. Big NEWS next coming week. Thanks for stopping by. Please feel free to contact me. HERE.
Godspeed
JS