Dear Dagen: Why Don't Fund Share Prices Change During the Day?

Though technology will allow it, the fund industry has philosophical problems. And there's the cost issue.
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Is there a good explanation why you can only buy or sell funds after the close? It seems to me funds should allow trades after the close and before the open, at least. -- Ron Dunn


You can place an order for shares of a fund anytime you like. But most funds price their shares once a day.

Just like your local liquor store, mutual fund companies are not geared toward constantly repricing their inventory. And despite the power of technology, they show little inclination toward intraday pricing.

Most mutual funds are priced at the close of the U.S. markets. If you place an order before the end of the trading day, you'll get that day's closing price. If you wait until after the market is closed, you'll get the next day's price.

However, there are some exceptions, notably the

Fidelity Select

funds, which are priced every hour on the hour from 10 a.m. to 4 p.m. ET during the week. The funds are narrowly focused on areas like computers and regional banks and can behave more like individual securities. Fidelity started this hourly pricing in 1986 to enable investors to trade these funds more like stocks.

So intraday pricing can be done. But the rest of the fund industry won't be joining hands to walk down that path any time soon.

As you know, fund companies collectively preach about investing for the long term. In their minds, giving people the ability to buy funds at oscillating prices during the day would encourage short-term thinking and trading.

However, this is more than just a control issue. It's also a matter of logistics. "During the course of a day, you're going to run into more errors and difficulties in pricing," says Gary Gastineau, senior vice president of new products for the

American Stock Exchange


For example, some international stocks or thinly traded securities may not be easy to price. By pricing at the end of the day, firms have more leeway and more time to deal with hard-to-price securities.

Fidelity ran into this problem with its Select funds during last year's market chaos. The firm was using what's called fair-value pricing on some of its Select funds during the trading day and wasn't disclosing the hourly prices on some of these portfolios until after the close. (Fair-value pricing is used when market quotations are not available or not considered reliable.)

Even during calm markets, intraday pricing would be an administrative and operational headache for many firms, and any extra cost would likely be a burden on shareholders.

If investors are constantly trading in and out of a fund, the transaction costs would go up as a portfolio manager is forced to buy and sell securities according to the money flows. Transaction costs come directly out of a fund's net asset value, putting a drag on the fund's performance.

Fidelity's Select funds combat this problem by levying a redemption fee of 75 basis points if you sell within 29 days. These fees go back into the funds to cover the transaction costs. And even if you hold one of these funds 30 days or longer, you'll still have to pay a flat $7.50 upon leaving.

In theory too, a fund company would have to hire more people and tweak their systems to handle additional pricing times.

"It's more trouble, and it's more costly," says Pamela Wilson, an attorney with

Hale and Dorr

in Boston. "And for what? There hasn't been any groundswell of demand from shareholders."

If the entire fund industry moved toward intraday pricing, the task would certainly be made a bit easier. But until that day arrives, you can trade some fund-like instruments during the day. The


offers several fund-like securities that trade every day, such as

Standard & Poor's Depositary Receipts

, or SPDRs

(SPY) - Get Report



Barclays Global Investors


planning to launch a load of new open-end, exchange-traded funds.

Hopefully, these options will tide you over until some sort of sea change occurs in the fund community.

Monica's Money

On my way to work this morning, I noticed a small item in the

New York Post's

Page Six column.

It looks like

Monica Lewinsky

has picked

Neuberger Berman

to run her money.

I wonder if that's the kind of celebrity endorsement that the top-flight firm would want as it's preparing to go public?

Send your questions and comments, along with your full name, to

Dear Dagen 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.