Closed End FundsBenefits

Closed-end funds issue a fixed number of shares during an initial public offering (IPO) and list those shares for secondary trading on a national securities exchange such as the American Stock Exchange. Professional managers invest the capital raised in stocks, fixed income securities, or a combination of both to meet the fund's specific objective, such as tax-free income or capital appreciation. Investors then buy and sell shares in the secondary market through their broker or financial advisor at market prices, which may be trading at net asset value (NAV), above NAV (trading at a premium), or below NAV (trading at a discount).

Click on the topics below for details on the benefits of closed-end funds:

Buying at a discount
Leverage potential
Stable pool of capital
Intraday trading
Buying and selling flexibility
Growth and income opportunities
Clear investment objectives

Buying at a discount
Shares of closed-end funds sometimes sell at a discount to their underlying NAV, which may give investors who buy shares at a discount the opportunity to enhance their overall investment return. The discount may not narrow over time, however, and short-term trading entails greater risks.

Leverage potential
Closed-end fund managers can elect to issue senior securities or borrow money to leverage their fund's investments to potentially enhance yields and returns to investors, particularly with fixed income closed-end funds.

Stable pool of capital
With a fixed number of shares, closed-end funds don't have to keep cash on hand or sell securities in a declining market to meet shareholder redemptions. Managers can remain fully invested and invest in securities with longer time horizons, which may result in higher yields and returns for investors.

Intraday trading
Intraday trading allows investors to buy and sell shares of closed-end funds just like the shares of other securities traded on an exchange, at any time throughout the trading day at market prices.

Buying and selling flexibility
Through a brokerage account, investors can specify limit price, buy on margin, or sell short, just as with common stocks.

Growth and income opportunities
In addition to portfolio performance, closed-end funds may provide other growth and income potential from dividends and distributions. Keep in mind that past performance is no guarantee of future results.

Clear investment objectives
Most closed-end funds invest in either stocks or bonds in pursuit of a specific objective, such as growth or income. While closed-end fund offerings cover virtually every asset class, more than 70 percent of funds seek monthly income from U.S. bonds, representing over 70 percent of the $213 billion in total assets. Nearly $41 billion is invested in U.S. equity funds and $10 billion in global equity funds. (Assets based on 2003 projected data provided by the Investment Company Institute.)
 

Municipal Bond Funds seek monthly income that is exempt from federal taxes or from a single state's taxes (and in some cases local taxes) by investing in municipal bonds issued by state and local governments and agencies. Closed-end municipal bond funds often use leverage to seek higher yields than similar funds that do not use leverage.

U.S. Bond Funds seek monthly income by investing in U.S. Treasury, government agency, and corporate bonds.

U.S. Equity Funds seek growth or growth and income by investing in U.S. equities. Sector Funds seek growth or growth and income by investing in stocks in a specific industry.

International and Global Funds seek growth, growth and income, or monthly income by investing in equities or bonds around the world (global funds), outside the U.S. (international funds), or in a single region or country.