Why can’t shares of open-end funds be traded during market hours?

Question

I can't really find a straightforward answer to this.

I read from Investopedia that NAV of open-end funds is calculated at the end of the day. So I believe that's the reason for why the fund can only be traded when the market closes. However, I'm not sure if this is the actual reason behind why one can only trade shares of the open-end fund once market closes.

Because shouldn't it be possible for NAV to be calculated instantaneously during the market hours (perhaps with computers/programs compiling real-time prices of all the stocks held by the fund)? If NAV can be calculated in real-time, then that'd be much more advanced than only calculating NAV at the of the day (we're in 21st century after all)? Thereby, this real-time NAV would allow open-end funds to be traded during market hours?

Answer 1

Open-end funds (aka mutual funds) are not traded on exchanges. Instead, the company that manages the mutual fund creates and redeems shares. All buyers and sellers go through that company. In theory, there could be a secondary market (exchange) for mutual fund shares, but this does not seem to happen.

Handling buyers and sellers puts a burden on fund companies -- managing cash and trades for these transactions alongside the intended portfolio. Calculating the NAV continuously and allowing people to invest and redeem throughout the day would be a serious burden, increasing the costs to all investors. Once a day is the traditional compromise, although some Guggenheim (formerly Rydex) funds intended for more active traders allow buying and selling at an NAV calculated twice a day.

The advantage of mutual funds is that (in the absence of loads) there is generally no fee/spread/slippage to buy or sell -- everyone gets the same price on the same day. However, to avoid "free riders" who would exploit this for frequent trading, the companies not only limit pricing to once a day, but restrict each investor from going in and out too often (e.g., requiring a 30-day wait).

Answer 2

ETFs provide the exact mechanism you're looking for, with different underlying mechanics (buying/selling units on an exchange rather than directly through the fund provider). But traditional mutual funds still have their place. They're perfectly fine for buy-and-hold investors, retirement accounts, pension funds, and other vehicles that don't need intra-day trading.

So there's no reason to dismantle or disrupt the Mutual Fund paradigm when another alternative already exists.