Closed-End
Funds
Many of you reading this have probably heard of open-end funds, most commonly known as mutual funds. I would venture to guess that far fewer know about their close relative the closed-end fund. Closed-end funds have been around since 1893, decades before the mutual fund, and currently there are more than 500 available.
What makes a closed-end fund different? They have an initial public offering
(IPO) period and the shares are subsequently traded in the open market between investors much like company stock. They also have a fixed number of shares outstanding, whereas mutual funds are always issuing and redeeming shares. Additionally, closed-end funds can be bought and sold throughout the day at a premium or a discount to the net asset value
(NAV) based on the supply and demand of the fund shares. Open-end fund shares are only bought and sold at the close of each business day based solely on the NAV plus any fees (sales charges), if applicable. The NAV is determined by taking the fund’s total assets less liability divided by the number of shares outstanding.
Closed-end funds are similar to the mutual fund in many ways. Both provide diversification, “pass through” taxation, professional management, and clear objectives to name a few. However, there are notable differences. Closed-end funds generally have lower expense ratios due to the fact that they are not always issuing and redeeming shares, they have no minimums to buy into or sell out of your holding, and a prospectus is not required once they are sold in the secondary market. You can also incur additional market risk compared to that of an open-end fund, since closed-end funds share values tend to fluctuate above or below the
NAV.
Closed-end funds offer an excellent way for investors to participate in investments with clear objectives and professional management, whether the objectives be stocks, bonds, regular income, growth, a highly specialized sector, a particular region of the country, or global exposure. Although closed-end funds are not suitable for every investor, they can be a great way to diversify a portfolio while also providing the opportunity to meet a specific need or goal. For more information on closed-end fund investing, feel free to call our office.
Source: Understanding The Advantages Of Closed-End Funds 2002. CLOSED-END FUND ASSOCIATION, INC.
