• Oaza Capital

ETFs and Closed End Fund History and Overview

The current popular conversation in investments is about Exchange Traded Funds (ETF) vs normal mutual funds. The conversation is always about low fees vs high fees. The one version that never seems to come up is about Closed End Funds, which are the granddaddy of all managed money.

The brief history of the modern managed money industry which included mutual fund, hedge fund, and exchange-traded fund (ETF) industries were started formally with The Investment Company Act of 1940

It clearly defines the responsibilities and requirements of investment companies as well as the requirements for publicly traded investment product offerings including open-end mutual funds, closed-end mutual funds and unit investment trusts. It primarily targets publicly traded retail investment products.

The next major development was the first index fund. This was a Wells Fargo fund formed in 1971. In 1974, the first mutual fund index shares were offered to retail investors.

Finally, exchange-traded funds came along in 1993 with the invention of TIPs (Toronto Index Participation Units) on the TSX.

The ETF is now growing tremendously globally with investors looking for lower fees during strong market cycles.

You can now get ETFs in a variety of investment focuses, types, industries, countries, security selection bias, etc.

The majority of ETFs are passive where the manager simple follows the direction of the fund outline with no or extremely little input from the manager. These ETFs are usually with the smallest fees down to less than 0.1% on large US Indexes or Fixed Income Funds. As they funds are very large and need little management input, they can still be very profitable for the fund companies to manage.

There are also ETFs that have an active management approach. They manager then has some or a tremendous amount of involvement in stock selection and management of the fund. Active ETFs are usually in sectors where it is difficult to get an index return or average. These would be in situations such as emerging markets, small or microcap stocks or sub investor grade fixed income.

The first money management structures that were set up pre 1940 and regulated after were Closed End Funds (CEF). These are funds listed on a stock exchange that have raised their capital in an IPO. The amount of capital in the fund then remains stagnant and only grows or decreases with market returns, management fee withdrawals or dividend or interest payments (as per the mandate in the prospectus). If the manager wishes to have more capital, he must complete a secondary offering to the stock market to raise more capital (similar to a normal common stock).

CEFs are not covered to the extent of mutual funds or stocks in the media as very few people have a vested interest in a product where no compensation is paid for new sales.

CEFs are diverse that offer benefits that include:

1. Income

2. Tax Efficiency

3. Simpler Tax Reporting

4. Ease of Trading

5. Opportunistic Flexibility


The choice between an index ETF, active ETF and Closed End Fund is depending on your investment choices, portfolio makeup, needs and recommendations from professional advisors. The important thing is to be aware of all your options and do your research.