Hi, I agree - this bit of text is not particularly clear. We have sorted it out for the 2012_13 notes. The ActEd description for ETFs now reads as follows:
ETFs are an unusual type of security that mixes many of the features of unit trusts and investment trusts that you will be familiar with from Subject CA1. On the one hand they are referred to above as “closed ended” because in normal conditions, the number of shares is fixed. This is like an investment trust.
However, authorised professionals, referred to as “Authorised Participants (APs)” can approach the manager of the ETF and swap shares in the underlying portfolio for newly created shares. This often happens in quite large sizes, rather than ones and twos.
Suppose that an ETF tracks the FTSE100 index. If an AP approaches the manager with a bundle of the 100 shares in the FTSE100, he can exchange these for new shares in the fund. The process can work in reverse if the AP wishes to exchange some ETF shares for a bundle of FTSE100 stocks.
So the fund can be considered “open ended” in this sense and hence, is more like a unit trust.
Hopefully this explains the odd mixture of descriptions - sometimes "closed ended" in the core reading, and then "open ended" in the ActEd text. They have attributes of both! The ability to exchange shares for the underlying portfolio (and vice versa) explains why the shares don't trade at a discount to NAV. In fact they trade pretty much at the NAV because other wise there is an arbitrage opportunity.
Later there is an ActEd summary of the key differences betwee unit trusts, investment trusts and ETFs. It was a bit confusing (although the details were taken from information on one of the largest ETF providers.) However it now reads:
Costs (annual fees) – ETFs generally charge lower fund management fees (“annual management charges”) than either unit trusts or investment trusts. This is because they are usually tracker funds, which can be run very cheaply.
Costs (commission) – ETFs are exchange-traded so trading incurs commissions and stock exchange trading fees, similar to an investment trust. There are no bid/offer spreads set by the managing company as is the case for unit trusts.
Tradability – ETFs can be traded in exactly the same way as shares in real time. This is an advantage relative to unit trusts, where the manager will generally trade only once a day.
Diversification – Because they are designed to track indices, some of which have several thousand shares, they may be very diversified portfolios.
Hopefully this helps sort out any difficulties. If you want a really full description, there is some excellent material online in finance.yahoo.com and also uk.ishares.com websites.
