What is considered a closed-end fund?
A closed-end fund is a type of mutual fund that issues a fixed number of shares through one initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
For example, a closed-end fund may invest in securities of very small companies, municipal bonds that are not widely traded, or securities traded in countries that do not have fully developed securities markets.
Closed-end funds, which are lesser known but more than a century old, have a fixed number of shares and are traded among investors on an exchange. Like stocks, their share prices are determined according to supply and demand, and they often trade at a discount or premium to their NAVs.
ETFs are open-ended funds, meaning they can constantly take on new investors and as they do, the fund's assets grow.
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.
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 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.
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.
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.
REITs are a fine way to get exposure to real estate. But why pay retail for them if you don't have to? The Nuveen Real Estate Income Fund (JRS, $7.91) is one of the best closed-end funds that invests in REITs.
Is a hedge fund a closed-end fund?
Investment Structure: Most hedge funds are open-ended, meaning that investors can continually add or redeem their shares in the fund at any time. Private equity funds, on the other hand, are closed-ended, meaning that new money cannot be invested after an initial period has expired.
While all investments come with some form of risk, closed-end funds carry more risk than others. Many investors might feel more comfortable investing in an ETF. ETFs trade throughout the day, like a closed-end fund, but they tend to track a market index, such as the S&P 500, which is an index of large U.S. companies.
That's because a mutual fund is one type of open-end fund. 3 Other types of open-end investments include hedge funds and ETFs. These are offered through fund companies, which sell shares in each directly to investors.
Closed-end funds (CEFs) can invest in specialized, less liquid corners of the market where open-end funds may not venture, such as alternative securities, real estate, and private placements. They enable individual investors to gain exposure to assets many could not access any other way.
Excluding a handful of exceptions, CEFs themselves do not pay taxes. Instead, like open-end mutual funds and ETFs, CEFs pass the tax consequences of their investments onto their shareholders.
Private equity funds are closed-end funds that are not listed on public exchanges. Their fees include both management and performance fees. Private equity fund partners are called general partners, and investors or limited partners.
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.
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.
With a closed-end fund, an investment company sells a fixed number of shares in the fund to investors. Managers of the fund have a relatively fixed amount of capital to invest over time, because investors can't withdraw money from the fund or buy in after the IPO — They can only buy or sell shares on an exchange.
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.
Are closed-end funds good for retirement accounts?
“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.
Conversely, closed-end fund shares are bought and sold at "market prices" determined by competitive bidding on exchanges and not at NAV. Let's assume that the market price is $18 per share and that NAV is $20. In this case, the closed-end fund sells at a discount of $2 per share.
For many years, all closed-end funds (CEFs) were structured as perpetual funds, meaning they have no “maturity” or termination date.
As of 2022, there were 441 closed-end funds in the United States, down from 462 funds in 2021.
Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day.
