Define Closed-End Funds
Closed-end funds are one of the four common types of investment companies. The others are open-end funds, also called mutual funds; unit investment trusts; and exchange traded funds, or ETFs. The differences between the types help describe closed-end funds.
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Function
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Closed-end funds issue shares just one time, when the fund is initially sold to investors. After issuance, the shares trade on the open markets and are not redeemed by the fund company.
Management
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The money in closed-end funds is actively managed to meet the investment goals of the fund. The managers buy and sell securities to generate profits. Most mutual funds are also actively managed, while ETFs and unit investment trusts are not.
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Opportunities
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Closed-end funds are allowed by the Securities and Exchange Commission to invest in more illiquid securities than mutual funds. Illiquid securities are those that cannot be easily converted into cash within seven days. Examples are thinly traded foreign stocks or unregistered debt instruments. Closed-end funds are often the best way to invest in these more obscure securities.
Features
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Many closed-end funds, especially bond funds, borrow money to leverage the fund's investments. This enables the closed-end funds to pay a higher rate of dividends than comparable mutual funds, or ETFs.
Potential
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A closed-end fund can trade on the open market at prices that are higher or lower than the fund's NAV, or net asset value per share. Buying funds at a discount allows an investor to buy a dollar's worth of assets at less than a dollar. If the fund performs well, the discount could shrink, further enhancing the total return.
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