Closed-End Funds vs UITs vs Open-End Funds: SIE Exam Guide

Until December 22, 2025, the most famous example of a unit investment trust was Invesco QQQ. Many study guides that explain UITs still use it.

That example is out of date. QQQ converted from a UIT to a standard open-end fund structure on that date, so a guide that calls it a UIT is describing a product that no longer exists in that form. The SIE doesn’t test tickers, but a source that gets the best-known example wrong is a source to double-check on everything else.

What the exam does test is structure: three kinds of investment company, and three questions that sort them. Is the number of shares fixed? Can you redeem them at net asset value? Is anyone actively managing the portfolio? Answer those and nearly every question on this topic answers itself.

The short answer

The Investment Company Act of 1940 recognises three basic types of investment company that SIE candidates need to know: open-end funds (mutual funds), closed-end funds, and unit investment trusts (UITs).

Open-end funds issue shares continuously and redeem them at net asset value (NAV). They have a board and an investment adviser. You buy at the public offering price and sell at NAV.

Closed-end funds sell a fixed number of shares in an initial public offering, then trade on an exchange at market price, which can sit above NAV (a premium) or below it (a discount). The fund does not redeem shares. It has a board and an investment adviser, and it can use leverage.

UITs buy a fixed portfolio and hold it, unchanged, until a termination date. There is no board and no investment adviser. Units are typically redeemable at about NAV.

	Open-end fund	Closed-end fund	UIT
Shares or units	Issued continuously	Fixed after the IPO	Fixed portfolio, sold in an offering
Redeemable at NAV	Yes	No	Yes, typically
Price you pay	NAV plus sales charge (POP)	Market price plus commission	Offering price including sales charge
Premium or discount to NAV	No	Yes	No
Board and investment adviser	Yes	Yes	No
Leverage (debt, preferred stock)	Bank borrowing only	Yes	No
Life	Perpetual	Perpetual	Fixed termination date

The full answer

The three types under the 1940 Act

The Investment Company Act of 1940 sorts investment companies into three classes: face-amount certificate companies, unit investment trusts, and management companies. Management companies split again into open-end and closed-end.

Face-amount certificate companies are rare and the SIE barely touches them. That leaves the three products above, which is what the SEC itself calls the three basic types.

All three pool investor money into a portfolio of securities and sell an interest in it. What separates them is how that interest is created, priced, and redeemed.

Open-end funds

An open-end fund is the standard mutual fund. It sells new shares continuously to anyone who wants them and redeems shares whenever an investor wants out.

Three details carry most of the exam weight:

Forward pricing. Your order is priced at the next NAV the fund calculates after it receives the order, under SEC Rule 22c-1. You don’t know your price when you place the order. NAV is calculated at least once per business day, typically after the 4:00 p.m. ET close.

Redemption at NAV. The fund must pay redemption proceeds within seven days of receiving the request (Section 22(e) of the 1940 Act). Seven days is the outer limit, not the usual experience.

Sales charges. You buy at the public offering price (POP), which is NAV plus any sales charge, and sell at NAV. FINRA Rule 2341 caps the maximum sales charge at 8.5% of the POP. Our post on mutual fund share classes covers how A, B and C shares apply it.

An open-end fund also can’t issue preferred stock or bonds. It can borrow from banks, but only while keeping 300% asset coverage. That limit matters when you reach closed-end funds.

Closed-end funds

A closed-end fund raises money once, in an initial public offering with a prospectus, and issues a fixed number of shares. After that, the shares trade on an exchange like any stock.

There is no redemption. If you want out, you sell to another investor at the market price. The fund isn’t required to buy your shares back.

Price comes from supply and demand, not NAV. NAV is what the portfolio is worth per share. Market price is what buyers will pay. They can differ.

Premium or discount is calculated as (market price − NAV) ÷ NAV:

NAV	Market price	Result
$20.00	$18.00	10% discount
$20.00	$22.00	10% premium

Open-end funds can’t drift from NAV, because the fund itself redeems and issues shares at NAV. A closed-end fund has no such mechanism, so nothing pulls the price back toward NAV except investor sentiment.

How you buy. In the IPO you pay the offering price, which includes a sales charge, and the fund receives a prospectus. After that, you buy in the secondary market through a broker and pay a normal commission. There’s no sales charge on the secondary market purchase.

Because the shares trade like stocks, you can enter limit and stop orders, buy on margin, and sell short. None of that is possible with open-end fund shares, which are always priced at the next NAV.

Leverage. A closed-end fund can issue preferred stock and debt, which an open-end fund generally can’t. The 1940 Act requires asset coverage of 300% for debt and 200% for preferred stock. Leverage magnifies gains and losses and increases the fund’s risk.

Distributions. Many closed-end funds follow a managed distribution policy, paying a steady amount monthly or quarterly. If the fund’s income doesn’t cover the payout, part of the distribution is return of capital, which reduces your cost basis rather than counting as income. See our taxation basics post for how basis works.

Interval funds and tender offer funds are closed-end funds that repurchase shares on a schedule. They’re still not redeemable on demand. Under SEC Rule 23c-3, an interval fund makes periodic repurchase offers for between 5% and 25% of its shares at NAV.

Unit investment trusts

A UIT is a different animal. It doesn’t have a manager making decisions. The SEC states it plainly: a UIT “does not have a board of directors, corporate officers, or an investment adviser.”

Fixed portfolio. A sponsor assembles a set of securities, for example a group of stocks or a ladder of bonds, and the trust holds them with little or no change for its whole life. The portfolio is listed in the prospectus.

Termination date. Every UIT has a set end date, specified when it’s created. At that point the trust dissolves and investors receive their share of the proceeds. A bond UIT shrinks as its bonds mature.

Redeemable. Unlike a closed-end fund, a UIT typically redeems units at about NAV. Many sponsors also maintain a secondary market where you can sell units at the market price.

Who does what. The sponsor creates and sells the trust. A trustee holds the assets and handles distributions. Nobody chooses new holdings.

Cost. Units are sold at an offering price that includes a sales charge. With no investment adviser, there is no advisory fee of the kind a mutual fund charges.

ETFs and the UIT connection

ETFs trade intraday like closed-end funds but, through authorised participants, create and redeem shares near NAV like open-end funds. That’s why their prices stay close to NAV. Our ETFs vs mutual funds post covers the mechanics.

Most ETFs are organised as open-end funds. A few older ones were set up as UITs, and that’s where the QQQ story comes from.

Under the UIT structure, Invesco couldn’t collect an advisory fee or do things modern ETFs routinely do: securities lending, dividend reinvestment, and custom redemption baskets. On December 22, 2025, QQQ converted to an open-end structure, and its expense ratio fell from 0.20% to 0.18% as part of the change.

The SPDR S&P 500 ETF Trust (SPY) is still described as the largest example of a UIT-structured ETF, and it carries an expiration date that has been extended over time. The lesson for the exam is about the structure, not the ticker: a UIT has no manager, a fixed portfolio, and a termination date, even when it trades like an ETF.

Diversified versus non-diversified

Management companies, meaning open-end and closed-end funds, are classified as diversified or non-diversified. A diversified fund must meet the 75-5-10 test (Section 5(b)(1) of the 1940 Act):

• 75% of total assets in cash, government securities, other investment companies, and other securities
• With respect to that 75%, no more than 5% of the fund’s total assets in any one issuer
• And no more than 10% of any one issuer’s voting securities

The exam usually just asks you to recognise the numbers. A fund that doesn’t meet the test is non-diversified.

Telling them apart on a question

Match the cue to the type:

If the question says…	It’s describing
Trades at a premium or discount to NAV	Closed-end
Fixed number of shares after the IPO	Closed-end
Issues preferred stock or debt	Closed-end
Market price plus commission	Closed-end (secondary market)
Forward pricing, redeemed at NAV	Open-end
Continuous offering	Open-end
No board, no investment adviser	UIT
Fixed portfolio, termination date	UIT

Common misconceptions

“Closed-end funds trade at NAV like mutual funds.” They trade at market price, which can be a premium or discount to NAV. Open-end funds are the ones priced at NAV.

“A UIT has a portfolio manager.” It doesn’t. No board, no investment adviser, and a portfolio that stays essentially fixed.

“You can’t get out of a UIT early.” Units are typically redeemable at about NAV, and many sponsors keep a secondary market.

“QQQ is the classic UIT.” It was, until December 22, 2025. It’s now an open-end ETF.

“A closed-end fund will buy back my shares.” It isn’t required to. You sell on the market. Interval funds repurchase on a schedule, but that’s not redemption on demand.

“Mutual funds can issue bonds and preferred stock to leverage.” Open-end funds are limited to bank borrowing with 300% asset coverage. Closed-end funds can issue debt and preferred.

“Every closed-end distribution is income.” A managed distribution can include return of capital, which lowers your basis.

“A UIT lasts forever.” Every UIT has a termination date, even when it has been extended.

What to do with this info

1. Memorise the three-column table. Fixed or continuous, redeemable or not, managed or not. Those three answers separate the products.
2. Learn the keyword cues. “Premium or discount,” “forward pricing,” and “no investment adviser” each point to one type.
3. Drill the premium and discount formula. (Price − NAV) ÷ NAV, with two quick examples, covers the arithmetic they test.
4. Study the structure, not the ticker. If a source teaches UITs by naming QQQ, treat its other examples with suspicion.
5. Pair this with sales charges. Open-end funds buy at POP and sell at NAV. Closed-end funds trade at market. Mixing those up is the most common slip.
6. Take a domain-scored diagnostic. Packaged products sit in the 44% products domain, so a weak spot here costs real points.

Related resources

• ETFs vs mutual funds — how ETFs borrow features from open-end and closed-end funds
• Mutual fund share classes (A, B, C) — the sales charges and 12b-1 fees behind POP
• REITs explained — another pooled product that trades like a stock
• Taxation basics for the SIE — return of capital and cost basis
• Order types: market, limit, stop — why you can place limit orders on closed-end shares
• Money market instruments — commercial paper, bankers’ acceptances, negotiable CDs and repos, and the 270-day rule
• Free SIE practice exam — a domain-scored diagnostic