At which price a close ended fund can be sold?
However, the price that it trades for on the exchange is market-driven. This means a closed-end fund can trade at a premium or a discount to its NAV. A premium price means the price of a share is above the NAV, while a discount is the opposite, below the NAV. There are several reasons for this.
Like equity shares, the closed-ended funds mainly trade on stock exchanges. This gives achance for investors to sell or buy fund units on the basis of real-time prices, which can be below (discount) or above (premium) the Net Asset Value of the fund.
Investors can buy and sell shares throughout the day, and the fund's price on the exchange fluctuates during the day, much like a stock. A closed-end fund's market price can be the same as or higher or lower than its net asset value per share. (We'll dig into this below.)
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.
Similar to a stock, when an investor wishes to purchase or sell shares of a closed-end fund, another investor must be located who wishes to sell or buy these shares. A closed-end fund issues a fixed number of shares at its initial public offering that generally remains constant.
"Closed" refers to the fact that, once the capital is raised, there are typically no more shares available from the fund sponsor and the issuance of new shares is closed to investors. After the IPO, most closed-end funds are listed on a national exchange such as the New York Stock Exchange (NYSE) or the NASDAQ.
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.
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 work similarly, as their shares trade on secondary markets rather than directly through the fund company and thus have a three-day settlement period.
The Series 6 license allows someone to sell closed-end funds in their initial public offering only.
How risky are closed-end funds?
Equity Securities Risk: Closed-end funds that invest in common stock and other equity securities are subject to market risk. Those equity securities can and will fluctuate in value for many different reasons.
Fixed-income investors are often attracted to closed-end funds because many provide a steady stream of income, usually on a monthly or quarterly basis as opposed to the biannual payments provided by individual bonds.
Because closed-end funds trade on a public exchange, the price of the units will be determined by the market. As such, at any point in time the price may trade at either a premium or discount to the stated NAV.
Closed-end fund investors who wish to exit the investment can do so only by selling the funds' shares to other investors on stock exchanges. In contrast, open-end funds are redeemed directly by the fund at net asset value.
Mutual fund liquidations, also referred to as "full closures," are never good news. Liquidation involves the sale of all of a fund's assets and the distribution of the proceeds to the fund shareholders. At best, it means shareholders are forced to sell at a time, not of their choosing.
A closed fund may stop new investment either temporarily or permanently. Closed funds may allow no new investments or they may be closed only to new investors, allowing current investors to continue to buy more shares. Some funds may provide notice that they are liquidating or merging.
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.
While open-end mutual funds cannot be purchased on margin, ETFs and closed-end mutual funds can often be purchased using a margin account. While open-end mutual funds cannot be purchased on margin, ETFs and closed-end mutual funds can often be purchased using a margin account.
To maintain tax-free status, a CEF must pass on to shareholders, generally speaking, roughly: 90% or more of net investment income from dividends and interest payments. 98% or more of net realized capital gains.
The reason why close-end funds sell at prices that differ from their net value is because they trade on the open market and are thus subject to fluctuations in their price according to the fluctuations in the market.
Are closed-end funds negotiable?
Once the shares are sold and the issuer collects the IPO proceeds, the fund's shares trade in the secondary market between investors. Therefore, closed-end funds are negotiable securities.
Unlike open-end funds, however, closed-end funds do not trade at their NAVs. Instead, their share prices are based on the supply of and demand for their funds and other fundamental factors. Consequently, closed-end funds can trade at premiums or discounts to their NAVs.
But Clough Capital research also shows that closed-end discounts widen as interest rates rise and narrow as they fall. That's largely because of the leverage strategies many of these funds employ: lower rates mean lower borrowing costs.
| No. | Symbol | Market Cap |
|---|---|---|
| 1 | BXSL | 6.00B |
| 2 | PDI | 5.10B |
| 3 | DNP | 3.20B |
| 4 | NEA | 3.19B |
1 Although the fund has no specified termination date, it can be terminated upon notice to shareholders.
