What Are Closed-End Funds and Should You Invest in Them?
Dec. 22 2020, Published 1:35 p.m. ET
A closed-end fund is a type of mutual fund that is designed as a collective investment model. It raises a fixed amount of money through an IPO and then lists shares on a stock exchange for trading. Portfolio managers don’t create additional shares to meet demand in the market. Here’s how a closed-end fund works and some of the best funds right now for your portfolio.
A closed-end fund is managed by a professional who oversees the portfolio and actively buys and sells holding assets. A closed-end fund is usually focused on a specific industry or sector, which makes them more subject to volatility.
How a closed-end fund works
A closed-ended fund is an actively managed mutual fund whose shares are traded on an exchange, like a stock or an ETF. The funds are termed “closed” since they only raise money once, through an IPO, before being closed to any other share purchases. The fund issues a fixed number of shares and the investment management firm doesn’t create additional shares to meet demand in the market.
A closed-end fund trades on a major stock exchange like a stock. The shares aren’t directly traded through the fund company after the IPO. The fund itself doesn’t redeem or issue shares daily. Investors can buy a closed-ended fund through a registered broker.
The price per share of the closed-end fund is determined by the market forces and is usually different from the NAV (net asset value) per share. The NAV of the fund is calculated by dividing the total net assets by the total number of shares issued. For example, if a closed-end fund owns 50 stocks that have a combined value of $100,000 with $5,000 liabilities and 10,000 shares outstanding, the fund has a NAV of $9.5. If investors are willing to pay only $9 per share of the fund, it's trading at a discount of about 5 percent to its NAV.
Closed-end funds are a good investment
A closed-end fund is a good investment since it's actively managed by a professional manager. The funds are usually listed on a major exchange like the NYSE or Nasdaq, which offers the benefit of intra-day liquidity for investors. A closed-end fund can also use leverage to generate higher returns.
Closed-end investments versus open-end investments
A closed-end fund differs from an open-end fund in several ways. An open-end fund constantly issues and redeems shares from investors, while a closed-end fund only raises capital once. The price of a closed-end fund is determined by the market forces since it's traded on a stock exchange. In contrast, the open-end fund’s price per share is determined only once based on the NAV at the end of the trading day.
Investors need to have a brokerage account to buy or sell a closed-end fund, while an open-end fund can be purchased directly from the investment management company.
Some of the best closed-end funds right now
The best closed-end funds to buy right now are the Cohen & Steers Quality Income Realty Fund, the Pimco Dynamic Credit Income Fund, and the Neuberger Berman High Yield Strategies Fund.
