Can I trade the (RYAOX) Rydex OTC fund for intraday movements in the Nasdaq 100? My broker doesn't allow trading of options, and I'd like to be able to trade the daily swings of the Nasdaq 100.
-- Jim Young
I am afraid not.
Most mutual fund companies process purchases and redemptions based on a fund's net asset value, or NAV, at the close of each trading day. And the Rydex OTC fund is no exception.
Certainly you can call your fund company at almost any time and place an order if you like. But for most open-end funds, that transaction is only executed once a day after the fund's NAV has been priced. That also is true for the Rydex OTC fund, which is priced just once a day.
Shares in a mutual fund don't trade like shares of stock. Unlike a stock, the price of an open-end mutual fund's shares is not based on supply and demand. Rather, an open-end fund's NAV -- the dollar value of a single share -- is based on the value of all the fund's holdings divided by the number of shares outstanding. And the shares don't trade on an exchange.
Instead, a fund's shares are bought and sold directly with the fund company, and new shares are issued when investors want to purchase them.
However, "some funds are set up to be bought and sold more often. Those are set up to be more specialized trading vehicles," says Kathleen Clarke, an attorney with
Seward & Kissel
in Washington, D.C.
Select funds probably are the best examples. All the Select funds are priced on the hour from 10 a.m. to 4 p.m. Eastern time, says a Fidelity spokeswoman. If someone makes a purchase between one hour and the next, the investor will receive the next closing price, she says. The Select funds do carry short-term trading fees, but that money goes back into the fund to compensate longer-term shareholders for the trading costs, the spokeswoman adds.
These Select funds are truly a different breed. Most fund companies, Fidelity included, try to discourage investors from frequently trading in and out of their funds and will try to limit the number of "round trips" an investor can make over a certain period of time.
, for example, is "looking at taking steps toward limiting the time in which an investor can make a round trip and the number of round trips they can make in a year," says an AIM spokesman.
It can be particularly difficult for a manager to run a portfolio that is experiencing massive inflows and outflows every day, says Clarke. A fund that investors are buying and selling frequently may incur hefty trading costs to meet redemptions, costs that are shouldered by the fund's remaining shareholders.
You may not be able to buy and sell the Rydex OTC fund during the day, but that fund company, unlike many others, will not try to dissuade you from frequent trading.
If you want to trade the Nasdaq 100 during each day, there is an alternative on the horizon. As I have
mentioned in this column before, the
Nasdaq-Amex Market Group
is getting ready to launch a Nasdaq 100 investment product sometime this quarter.
The vehicle, structured as a unit investment trust, will trade like a stock on the
American Stock Exchange
and resemble the existing
Standard & Poor's Depositary Receipts
, or SPDRs. Investors will be buying into a trust that holds a portfolio consisting of Nasdaq 100 securities
You will be able to purchase these securities at any time during the trading day, and you also will be able to short them. I suggest you check the Amex's
Web site. You should be able to find a prospectus there soon.
Any questions? Send your queries to me at
firstname.lastname@example.org, and include your full name.
TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.