Not all mutual funds are represented through brokers and sold directly to investors. There are also exchange-traded mutual funds that are traded on stock exchanges, very similar to stocks in general.
Exchange traded mutual funds are legally classified as either open-end funds or as Unit Investment Trusts. Exchange traded mutual funds are similar to their other open-end counterparts in the sense that they both assets composed of stocks and bonds. They are becoming more favored by investment professionals because of their reduced costs, tax efficiency, and stock-like features.
However, exchange traded mutual funds differ from other mutual funds because only “authorized participants” such as large institutional investors are able to purchase and redeem shares directly from the exchanged traded mutual fund manager. Individual investors can then trade them on the stock market with more traditional mutual funds. Investors work directly with the funds’ money managers to purchase or redeem shares. With exchange traded mutual funds, the authorized participants act as the funds’ money manager.
Exchange traded mutual funds also differ from open-end funds and UIT as they are not usually purchased with cash, they are purchased with a mix of other securities of equal value. After the large institutional investors conduct the purchased transactions of the “creation unit,” the shares can be split up and sold on the secondary market such as the stock exchange as an exchange traded mutual fund. Investors who would like to sell their exchange traded mutual funds can do so either through the secondary market or by selling them back to the originator of the creation unit.
Like all other mutual funds, exchange traded mutual funds must come with a prospectus with full disclosure per the Securities Exchange Commission regulations. It is important for investors to review all the material for their exchange traded mutual funds so they are clear of their expectations and terms of the investment.