One Law, Many Structures
Although each vehicle pools investor cash, their mechanics vary sharply. Below, you will find concise snapshots that highlight how they diverge—no recommendations, just facts.
1. Unit Investment Trusts (UITs)
Fixed-term, buy-and-hold baskets
| Feature | Details |
|---|---|
| Portfolio | Created once, then left unchanged. |
| Management | Passive after launch. |
| Share Flow | Units sold by the sponsor and later redeemed by the trustee. |
| Pricing | Initial offer at a slight premium; thereafter quoted NAV from sponsor. |
| Liquidity | Limited; cash arrives only after trustee processes redemption. |
| Tax Impact | Few capital-gain events until termination, because turnover is near zero. |
2. Open-End Mutual Funds
Continuously issued and redeemed at NAV
| Feature | Details |
|---|---|
| Portfolio | Actively or passively managed; holdings can change daily. |
| Share Flow | Fund expands or contracts at each day’s close. |
| Pricing | Single end-of-day NAV. |
| Liquidity | Orders execute once per trading day, after the bell. |
| Fees | Expense ratio plus possible sales loads or 12b-1 charges. |
| Tax Impact | Realized gains are distributed annually when turnover occurs. |
3. Closed-End Funds (CEFs)
Exchange-listed funds with fixed share counts
| Feature | Details |
|---|---|
| Portfolio | Commonly active; leverage is frequent. |
| Share Flow | Set at IPO and seldom changes. |
| Pricing | Market price drifts above or below NAV. |
| Liquidity | Intraday trading on an exchange, just like any stock. |
| Leverage | Often used to boost income, which can raise risk. |
| Tax Impact | Similar to mutual funds; distributions depend on trading activity and leverage. |
4. Exchange-Traded Notes (ETNs)
Debt securities that mirror index returns
| Feature | Details |
|---|---|
| Instrument | Unsecured promise from the issuing bank. |
| Credit Risk | Tied to issuer solvency; no asset pool behind the note. |
| Pricing | Trades all day and tracks an “indicative value.” |
| Liquidity | High; authorized participants create or redeem notes intraday. |
| Tax Impact | Usually no interim capital-gain distributions; tax occurs at sale. |
5. Exchange-Traded Funds (ETFs)
Open-ended funds that trade intraday
| Feature | Details |
|---|---|
| Portfolio | Typically index-based, though active lines are growing. |
| Share Flow | Creation units swapped in-kind with authorized participants. |
| Pricing | Real-time market price plus daily NAV disclosure. |
| Liquidity | Very high; shares can be bought, sold, shorted, or margined whenever the market is open. |
| Fees | Generally lean expense ratios and no sales loads. |
| Tax Impact | In-kind redemptions help minimize taxable distributions for most equity ETFs. |
Quick-Compare Table
| Attribute | UITs | Mutual Funds | CEFs | ETNs | ETFs |
|---|---|---|---|---|---|
| Intraday Trading | No | No | Yes | Yes | Yes |
| Share Supply | Fixed units | Expands/Contracts | Fixed | Expands/Contracts | Expands/Contracts |
| Premium/Discount to NAV | N/A | None | Possible | Small (arbitraged) | Small (arbitraged) |
| Portfolio Turnover | None | Varies | Varies | N/A | Varies |
| Expense Profile | Setup + low O&M | Low–High | Moderate | Low | Low |
| Credit Risk | Low | Low | Low | Issuer credit | Low |
Key Takeaway
By knowing how each structure prices shares, handles liquidity, and passes through taxes, you can better match a vehicle to your specific needs—no matter the portfolio size.
References
Rogers, A. (2013) ETFs vs. Mutual Funds: Which one is right for you?. Money Management Executive, 21(26), 10-10.