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Frequently Asked Questions About Closed-End Funds

Why invest in a closed-end fund?

Closed-end funds (CEFs) are designed to provide an attractive income with an opportunity for total return. Like mutual funds, they offer investors professional investment management and diversification, but unlike mutual funds they can be bought and sold during inter-day trading offering more control over buy and sell decisions. Featuring total return—asset appreciation + income distributions—there are over 700 closed-end funds across a variety of strategies that can help fill a vital role in an investor's portfolio. CEFs trade at a discount or premium to their net asset value, therefore they may offer the potential to purchase the investment assets in a fund's portfolio at an attractive, discounted price, which can lead to enhanced returns.

What benefit does a closed-end fund offer over a regular mutual fund? 
Unlike mutual funds which can only be bought or sold on the price established at the end of the trading day, closed-end funds can be purchased and sold throughout the trading day with no minimum required. Their shares are traded on an exchange between investors, creating the opportunity to buy at a discount. Since closed-end fund shares are traded on an exchange, portfolio managers are not required to purchase or sell shares to meet cash flow demands, allowing portfolio managers to stay fully-invested. Closed-end funds can borrow money to invest in more assets (referred to as leverage) to enhance their return. Leverage allows portfolio managers the ability to enhance yield and provide investors with superior performance and flexibility, although it can also carry increased risks that investors should be aware of before making any purchase. Closed-end funds generally offer lower expense ratios, resulting in the chance to enhance investment performance over time. Additionally, an investor pays one commission to buy closed-end fund shares and another when sold.

What benefit does a closed-end fund offer over an Exchange-Traded Fund (ETF)?
Closed-end funds are actively managed and the manager makes portfolio decisions with the objective of outperforming the market indices. CEFs are unlike the majority of ETFs, which are passively managed, where programmed trading tracks an appropriate index or benchmark. The defined pool of assets in closed-end funds provides the ability to buy less liquid asset classes and typically, closed-end funds have more competitive yields.

Why do some closed-end funds sell at a discount/premium?
A closed-end fund's share price is based on its market price as determined by supply and demand among investors. Market conditions can influence the price of a CEF being above (at a premium to) or below (at a discount to) it's NAV. Some of the factors that may impact whether a fund trades at a premium/discount are the fund's performance, yield, or name recognition of a fund's manager. Discounted closed-end funds offer investors the advantage of buying the fund's underlying assets at a discount, which can lead to enhanced returns.

Why invest in a closed-end fund at its Initial Public Offering (IPO)?
Closed-end funds are first offered to investors during an Initial Public Offering and are closed to new capital after that offering period, hence the term "closed-end". There are various benefits to investing in a closed-end fund IPO, including the ability to access new and unique investment strategies, along with liquidity. At the IPO, a closed-end fund may also deliver a more competitive yield than an existing fund. Contrary to popular belief, closed-end fund IPO fees are generally lower than most front-end load mutual funds. The median cost on front-end load mutual funds is 5.5%; closed-end fund IPO fees generally range from 4.5%-4.75%. A recent study on closed-end IPOs by Morningstar showed that since 2000, "the majority of CEF IPOs have posted positive total returns since inception on both net asset value and share price basis." Based on average annualized total returns over a 10-year period, closed-end funds tended to outperform their respective open-end fund counterparts in most equity and fixed income categories. Source: CEFA, Morningstar, Lipper

Is it easy to buy a closed-end fund?  
Yes! Closed-end funds can be purchased through any broker-dealer or advisor and feature the ability to use trading strategies such as shorts, puts and other tactics.


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