Exchange Traded Funds - How do They Work

Chris75

As I understand it an Exchange Traded Fund is composed of a number of shares which are traded through a stockmarket.

Is it an open ended fund where new shares are created/ redeemed as demanded or a closed ended fund where, at least for a period of time, the number of shares is fixed?

I ask because the literature suggests shares but there is no NAV, nor premium/discount as there is with Investment Trusts which have a fixed number of shares.

I am looking at mainstream ETF's such as Vanguard FTSE All World (big) and Vanguard FTSE All World High Dividend (small & with few trades)

Chino

Watch this: https://www.khanacademy.org/economics-finance-domain/core-finance/investment-vehicles-tutorial/mutual-funds/v/exchange-traded-funds-etfs

Chris75

Yes that explains it. Thank you.

I am not asking for an answer to this but I am not really sure how it reduces total cost as rather than dealing with say Vanguard you are dealing with a third party "stockholder" who presumably expects to be paid. At the end of the day if it was cheaper for tracker funds to create/redeem in blocks I guess that they would.

Glen_Clark

Chris75 wrote: »

Yes that explains it. Thank you.

I am not asking for an answer to this but I am not really sure how it reduces total cost as rather than dealing with say Vanguard you are dealing with a third party "stockholder" who presumably expects to be paid. At the end of the day if it was cheaper for tracker funds to create/redeem in blocks I guess that they would.

My understanding is the brokers make their money from the 'spread' = difference between buying and selling price. When they have no units to sell they get more units from the issuer by paying the issuer with shares in individual companies that make up the index, rather than cash, avoiding their dealing spreads and stamp duty.
As with indivudual company shares, if its a huge frequently traded fund like VUSA, spreads are very low. Wheras small infrequently traded funds tend to have higher spreads.

aroominyork

What is the difference between ETFs and investment trusts please?

Glen_Clark

aroominyork wrote: »

What is the difference between ETFs and investment trusts please?

Thats a big question to answer in one post
I suggest you see: https://en.wikipedia.org/wiki/Exchange-traded_fund
then ask if there is anything you don't understand.