CEFs versus ETFs and Mutual Funds - Fidelity (2024)

FAQs

Are CEFs better than ETFs? ›

Greater price stability: For investors who prefer to buy or sell shares of a fund at a market price that is consistently near its NAV, ETFs provide more pricing stability than closed-end funds, which may trade at a market price further above or below its net asset value.

Like a traditional mutual fund, a CEF invests in a portfolio of securities and is managed, typically, by an investment management firm. But unlike mutual funds, CEFs are closed in the sense that capital does not regularly flow into them when investors buy shares, and it does not flow out when investors sell shares.

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

Most are seeking solid returns on their investments through the traditional means of capital gains, price appreciation and income potential. The wide variety of closed-end funds on offer and the fact that they are all actively managed (unlike open-ended funds) make closed-end funds an investment worth considering.

Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund's investment objective will be achieved.

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.

Unlike ETFs, mutual funds can be purchased in fractional shares or fixed dollar amounts. ETFs typically have lower expense ratios than mutual funds because they offer minimal shareholder services. Though mutual funds may be slightly more costly, fund managers provide support services.

The largest Fidelity ETF is the Fidelity Wise Origin Bitcoin Fund FBTC with $11.22B in assets. In the last trailing year, the best-performing Fidelity ETF was FDIG at 84.33%. The most recent ETF launched in the Fidelity space was the Fidelity Yield Enhanced Equity ETF FYEE on 04/11/24.

You only need to purchase high-quality CEFs and focus on the income. Use the rule of 72 as your guide. Dividing 72 by the yield tells you how long it'll take to receive your initial investment back (or double your investment). For example, it'll take 7.2 years to receive your investment back at a 10% yield.

What are the risks of CEF funds? ›

CEFs frequently trade at a discount to NAV and there is no assurance a CEF will appreciate to its NAV. Interest rate Risk – Income received from a CEF may fluctuate significantly based on changes in interest rates. As interest rates rise, bond prices usually fall, and vice versa.

Because closed-end funds are often actively managed by an investment manager who is trying to beat the market, they may charge higher fees, making them less attractive to investors. Closed-end funds frequently use leverage — borrowing money to fund their asset purchases — to increase returns.

Illiquid securities typically are more difficult to value and may be impossible to sell at any point in time. As a result, CEFs that hold a higher percentage of portfolio assets in illiquid securities may be more volatile than their peers.

Closed-End Fund Leverage

Many closed-end funds employ leverage, meaning they borrow funds, to increase returns. The math works like this. Say you can borrow money at a 3% short-term rate and invest it in longer-term assets returning 7%. Using those numbers, you're making 4% annually on the borrowed funds.

CEFs can allow you to create the paycheck you need to live your best life in retirement, but what are the risks? Long-term CEF investing. Closed-End Funds utilize leverage (loans) to increase their returns. Leverage makes good returns great and bad returns horrible.

Mutual funds have higher management fees. ETFs are passively managed, mirroring a particular index, making them less risky and transparent. Mutual funds are actively managed, with fund managers investing based on analysis and market outlook. ETFs allow investors to start with smaller amounts.