What Is an Open-End Management Company?

What Is an Open-End Management Company?

Let me explain what an open-end management company is—it's a type of investment company that handles the management of open-end funds. You should know that these companies oversee both open-end mutual funds and exchange-traded funds, or ETFs, as they're commonly called.

Key Takeaways

As I see it, the core point is that an open-end management company manages open-end funds, including mutual funds and ETFs. Remember, open-end mutual funds aren't traded on exchanges, so the company itself handles distributing and redeeming all shares available in the market. For ETFs from these companies, there's no fixed number of shares, allowing the company to issue and redeem them as needed. Both open-end funds and ETFs share similarities as pooled funds that provide management and operational efficiencies. In contrast, closed-end funds have a set number of shares, trade at market prices throughout the day, unlike open-end funds priced once daily at their NAV.

How an Open-End Management Company Works

You need to understand that an open-end management company falls under the category of a management investment company, as defined by the Investment Company Act of 1940. Investment companies are grouped into three main types: face-amount certificate companies, unit investment trusts, and management companies. All of them manage assets in various investment products and must adhere to the rules from the 1940 Act, plus the Securities Act of 1933 and the Securities Exchange Act of 1934.

These open-end companies are most commonly linked to managing open-end mutual funds, but they also handle ETFs. Take Vanguard as an example—it's a well-known open-end management company. What makes open-end funds 'open' is their ability to continuously accept new investors and capital, rather than closing off at some point. All the capital from different investors gets pooled together.

Shares get issued as long as buyers are interested, and they're bought and sold at the net asset value, or NAV. If you're looking for an easy way to get diversified exposure to financial markets with a specific goal, open-end funds are a straightforward option.

Types of Open-End Management Companies

Let's break this down into the main types, starting with mutual funds. Open-end mutual funds don't trade on exchanges, so the management company takes care of distributing and redeeming all shares in the market. There's no set number of shares for these funds.

They get sold and redeemed at their daily NAV per share. According to investment rules, transactions happen at the forward NAV, meaning you transact at the next NAV after your request. These funds pool investor money for better operational and management scale. They're managed toward various objectives, using different strategies across market sectors.

Open-end funds provide multiple share classes for retail and institutional investors, including special ones for retirement. While the company manages transactions directly, you might use intermediaries. Fees apply through intermediaries, based on the fund's sales load structure in the prospectus. Full-service brokers charge more, while discount brokerages have lower fees but possible minimums.

Now, on to ETFs—these are also from open-end management companies and don't have a fixed share count, so the company issues and redeems as it sees fit. ETFs trade actively on exchanges like stocks throughout the day. They don't have varied share classes with different fees; you buy them via brokers or platforms.

ETFs are typically passively managed, replicating benchmarks like the S&P 500 by buying the listed stocks. This gives you exposure to many shares without buying individually, and their passive nature means low expense ratios. Both open-end funds and ETFs are pooled for efficiencies and offer wide-ranging strategies. As a note, total net assets of U.S.-registered mutual funds worldwide hit $23.9 trillion in 2020.

How to Invest in Open-End Funds

If you're wondering how to invest, there are several ways, but using a broker is often the best approach. A broker will sell you shares of a specific fund. For an ETF, log into your broker's portal, select it, and buy it just like a stock.

For example, if you want S&P 500 exposure, consider State Street's SPDR S&P 500 Trust (SPY) or iShares Core S&P 500 ETF (IVV). Big firms like Vanguard offer over 100 mutual funds with targeted goals for you to choose from.

Open-End vs. Closed-End Funds

The key difference is that open-end funds stay open to new investors and capital, while closed-end funds close off. Closed-end managers think the fund's size is optimal and growing it could hurt the strategy or market.

Closed-end funds issue a fixed number of shares via an IPO, list on exchanges, and trade on the secondary market through brokers. Shares trade at market prices all day, not end-of-day NAV like most open-end funds. Open-end funds, however, value at NAV (except ETFs) and can issue new shares if demand exists. Both are professionally managed, invest in various assets, and pool capital for scale.

What Is the Main Difference Between Open-End and Closed-End Funds?

To clarify, closed-end funds have limited shares via IPO, priced at market value all day, while open-end funds price mostly at daily NAV, stay open, and issue new shares as needed.

What Is an Open-End Index Fund?

An open-end index fund tracks a specific index like the S&P 500 by buying its stocks to match returns. It differs from ETFs by pricing at daily NAV and transacting once a day.

How Do I Know if a Fund Is Open-Ended?

Check the prospectus or website for details. You can also tell by its pricing at NAV.