Who buys closed-end funds?
You can buy or sell closed-end funds through all types of brokerage firms, including full-service brokers, discount brokers and online brokers. In each case, you pay your brokerage firm a commission for the services provided.
Closed-end funds (“CEFs”) can play an important role in a diversified portfolio as they may offer investors the potential for generating capital growth and income through investment performance and distributions.
A closed-end fund generally does not continuously offer its shares for sale but instead sells a fixed number of shares at one time. After its initial public offering, the fund typically trades on a market, such as the New York Stock Exchange or the NASDAQ Stock Market.
Closed-end fund shares are bought and sold in the same way one would buy corporate stocks—through registered broker-dealers. During the IPO, a fixed number of closed-end fund shares are offered to investors. After the IPO, an investor may purchase shares of existing closed-end funds in the secondary market.
Shares that sell at a price higher than the NAV are said to be sold at a premium, and shares that sell at a price lower than the NAV are said to be sold at a discount. Closed-end fund shares may sometimes trade at a discount, but may sometimes sell at a premium.
Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund's investment objective will be achieved.
The closed-end structure also has other implications
A closed-end fund manager does not have to hold excess cash to meet redemptions. Because there is no need to raise cash quickly to meet unexpected redemptions, the capital is considered to be more stable than in open-end funds. It is a stable capital base.
One of the largest closed-end funds is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG). Founded in 2007, it had total net assets of $2.7 billion as of Dec. 31, 2023. 2 The primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation.
Investors who own shares when the fund terminates receive a cash payment equal to the NAV per share at that time. This NAV may be higher or lower than what the investor originally paid.
CEFs do not issue or redeem shares daily. Instead, CEF shares trade on an exchange intraday, like stocks. The share price for a CEF is set by the market.
How are closed-end funds valued?
Because closed-end funds trade like stocks, the supply and demand for the shares determines their market price. Both closed-end funds and mutual funds have an inherent net asset value (NAV) that reflects the value of the funds' underlying assets (less liabilities) divided by the number of shares outstanding.
Market Price based on Demand and Supply
Like equity shares, the units of closed ended schemes are sold on the stock exchange at prices determined by the demand and supply of the units of the scheme.
The closed-end mutual fund refers to a debt fund or equity where a fund house must issue a specified units during its launch. When the time period of the NFO ends, the investors can no longer redeem or purchase units of the close-ended mutual fund.
Most commonly, the reason a CEF trades at any given discount or premium is related to the fund's distribution rate, regardless of the source of the distribution.
Key takeaways. CEFs have distributions, not yields or dividends: A CEF portfolio's yield may contribute to the distribution. Dividends received in the CEF portfolio may contribute to the distribution.
Leverage is the secret sauce that allows many closed-end funds to pay much higher dividends than similar conventional mutual funds or ETFs. Leverage works great as long as the spread between short- and long-term rates doesn't shrink too much.
CEF portfolios often hold longer maturity investments, so rising long-term rates will likely diminish a fund's NAV. However, the income from bond coupons is likely to remain intact and available for fund distributions, and bond calls are typically reduced.
“If you are a retiree and you are counting on monthly income, CEFs may fit perfectly in your portfolio,” she says. But Marfatia also cautions that while CEFs provide exposure to a wide variety of asset classes, they often contain leverage, which means additional risk.
The Bottom Line
CEFs, while costing more because they are mainly actively managed, can trade at a discount to their NAV. Investors looking for standard, safer investment strategies would do well choosing an ETF, whereas investors looking for alpha returns may do better with a CEF. Fidelity. "Closed-end Funds vs.
A closed-end fund's liquidity depends on investor supply and demand, so it can be less liquid than an open-end fund. These funds are also subject to increased volatility because shares can trade above or below their NAV. Another potential drawback is that many closed-end funds use leverage.
Are closed-end funds high risk?
Closed-end funds operate more like ETFs, in that they trade throughout the day on a stock exchange. Closed-end funds have the ability to use leverage, which can lead to greater risk but also greater rewards.
As of 2022, there were 441 closed-end funds in the United States, down from 462 funds in 2021.
Ticker | Name | 5-year return (%) |
---|---|---|
AMAGX | Amana Growth Investor | 17.62% |
APGYX | AB Large Cap Growth Advisor | 17.00% |
PBFDX | Payson Total Return | 16.58% |
CFGRX | Commerce Growth | 16.48% |
Mutual Funds | ETFs | |
---|---|---|
Trades executed: | Once per day, after market close | Throughout the trading day and during extended hours trading |
Settlement period: | From 1 to 2 business days | 2 business days (trade date + 2) |
Short sales allowed? | No | Yes |
Limit and stop orders allowed? | No | Yes |
Yes. Income from taxable funds and all capital gain distributions are taxable, regardless of whether you receive them in cash or reinvest them in additional fund shares. You should keep a record of the amount of dividends reinvested because this will increase your cost basis in the fund's shares.
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