What are closed-end funds?
Closed-end funds are a type of investment company that offers a fixed number of shares, which are traded on a stock exchange just like stocks. Assets are professionally managed in accordance with the fund's investment objective and policies, and may be invested in equities, fixed income securities, or a combination of both. Like other publicly traded securities, the value of closed-end fund shares fluctuates and is determined by supply and demand in the marketplace.
How do closed-end funds differ from open-end funds?
Closed-end funds issue a fixed number of shares whereas open-end funds constantly offer new shares for sale and redeem outstanding shares on any business day at net asset value (NAV). Purchases and redemptions of open-end funds typically take place only once a day at NAV. In contrast, closed-end funds can be bought or sold continuously throughout the trading day on an exchange. During the trading day, closed-end funds trade at prices that can be at NAV, above NAV (trading at a premium), or below NAV (trading at a discount).
How do closed-end funds differ from exchange traded funds (ETFs)?
While both closed-end funds and ETFs are investment companies whose shares trade in the open market, they differ in how their shares are issued and redeemed. Closed-end funds issue a fixed number of shares in an IPO, which sometimes trade at a premium or discount to NAV in the secondary market. ETFs have a unique creation and redemption process that allows ETF shares outstanding to increase or decrease and prevents a significant premium or discount to NAV. Closed-end funds and ETFs also differ in the types of products available. For example, at present most ETFs are based on index portfolios, whereas closed-end funds are usually based on actively managed portfolios. Also, at present no ETFs are available based on municipal securities.
What influences the share prices of closed-end funds?
A closed-end fund's share price may increase or decrease based on market demand, which can be influenced by many factors, including market perception of the holdings, investment manager, types of securities or region in which the fund invests, interest rates, as well as its investment performance, net asset value, and dividend and capital gain distributions.
Where can I find net asset values (NAVs) for closed-end funds?
NAV data can be obtained from the website of the closed-end fund (which is included on the fund's company description page on amex.com, if available) or from the Closed-End Fund Association's website, www.cefa.com.
What are the risks of investing in closed-end funds?
All closed-end funds are subject to general market risk and, depending on their investment policies and the types of securities in which the funds invest, may also be subject to issuer, credit, interest rate, prepayment, inflation, liquidity, political, currency, and leverage risk. For a complete discussion of the risks for a particular fund, investors should consult with an investment advisor and read the prospectus carefully before investing.
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