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What are Closed-End Funds?

Mutual Funds can be categorized as either open-end funds, which are more common, and closed-end funds, which are a little more complex. A closed-end fund (CEF) is a collective investment model based on issuing a fixed number of shares. A closed-end fund is typically organized as a publicly traded investment company on a Securities Exchange. Unlike open-end funds, new shares in a closed-end fund are not created to meet demand from investors.

A closed-end fund raises a prescribed amount of capital through an IPO by issuing a fixed number of shares. Unlike regular stocks, a closed-end fund represents an interest in a specialized portfolio of securities that is actively managed by a professional portfolio manager, and typically focuses on a specific industry, geographic market or sector. The stock price of a closed-end fund fluctuates according to market forces, such as supply and demand, as well as the changing values of the securities in the fund's holdings.

Unlike open-end funds, closed-end funds trade just like stocks. While open-end funds are priced only once at the end of the day, closed-end funds are traded and priced throughout the day. One of the unique features of a closed-end fund is how it is priced. The net asset value (NAV) of the fund is calculated regularly. However, the price that it trades for on the exchange is determined entirely by supply and demand. This can lead to a closed-end fund trading at a premium or a discount to its net asset value (NAV).

Why Invest in Closed-End Funds?

  • LIQUIDITY - Like stocks, CEFs “traded on an exchange” so they can be bought and sold throughout the day between individual investors. Being able to trade CEFs like a stock means they can be used for shorter-term exposure or as part of a long-term investment strategy.
  • MARKET PRICING - Intraday trading allows investors to buy or sell shares that may be above or below the fund’s NAV (net asset value).
  • LOWER EXPENSE RATIOS - With a fixed number of shares, closed-end funds do not have ongoing costs associated with distributing, issuing and redeeming shares as do open-end funds. This often leads to closed-end funds having lower ongoing expense ratios than other funds with similar investment strategies.
  • STABLE ASSET BASE - Because closed-end funds raise a set amount of capital through the fund’s initial public offering (“IPO”), portfolio managers are provided with a stable base of assets from which to invest in securities. A stable asset base allows the fund manager to follow the fund’s investment strategy, without having to manage inflows or redemption requests.
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