During volatile trading, a customer at Sterling Direct wants to buy a broad-market fund but insists on setting a limit price and executing immediately rather than waiting for an end-of-day price. His representative must explain how pricing differs between an exchange-traded fund and a traditional open-end mutual fund. Which statement should the representative give?
- ABoth products are priced only once per day at net asset value, so a limit order cannot be used to buy either of them during the trading session.
- BBoth products trade continuously on an exchange at market prices, so either one can be bought with a limit order that executes immediately during the session.
- CThe open-end mutual fund can be bought intraday with a limit order, whereas the exchange-traded fund is priced only once daily at its net asset value.
- DThe exchange-traded fund can be bought intraday at a market price with a limit order, whereas the open-end mutual fund is priced once daily at the next computed net asset value. Correct
Why A is wrong: This is tempting because both are pooled funds, but only the open-end mutual fund uses once-daily forward pricing; the ETF trades intraday and does accept limit orders.
Why B is wrong: The intraday trading claim is true for the ETF, but an open-end mutual fund does not trade on an exchange, so applying continuous market pricing to both is incorrect.
Why C is wrong: This reverses the two products; it is tempting if a candidate confuses the names, but it is the ETF that trades intraday and the mutual fund that is priced once daily.
Why D is correct: Correct: ETFs trade intraday on an exchange at market prices and accept limit orders, while open-end mutual fund orders are filled at the next forward-priced NAV computed after the market close.