How to Buy Closed-End ETFs

Closed-end exchange-traded funds (ETFs) are hybrid securities that have traits of both ETFs and mutual funds. Closed-end ETFs, commonly called CEFs, are traded like individual stocks and represent an index, but they are traded in the open market, unlike mutual funds. It's easy to buy closed-end ETFs, but you should know a few things about them before you start investing.

Difficulty: Moderate

Instructions

Things You'll Need:

• Stockbroker

1. Research your potential ETF purchase to be sure it is a closed-end ETF. Go to the website of the issuer of the ETF, usually a mutual fund, to get an exact description of the closed-end fund.

2. Talk to your broker to buy closed-end ETFs. You just need to give your broker the name and number of shares of the CEF that you want to buy, and he'll take care of the purchase. Remember that you'll have to pay a commission to your broker for every transaction you make with closed-end ETFs.

3. Set specific limits on how you'll hold your new closed-end ETFs. Since these securities trade like stocks, you can set hold, buy and sell orders that are tied to potential price changes of the CEF. For example, you can tell your broker to sell the stocks if they drop 10 percent or more in value or to buy more if the price increases 2 percent.

4. Remember that as a CEF holder, you'll have the first chance to buy new stocks if the fund decides to release more into the market. The CEF issuers let you buy shares from a new offering in proportion to your current holdings to help protect your investment as the market grows.

5. Watch for jumps in CEF values as more information about them reaches the public. The issuers of closed-end ETFs are generally very slow about giving the public details about the makeup of the securities. An investor can capitalize on this fact since CEFs often trade at prices below their net asset value, and once the general public learns more about the fund, prices can increase.

Tips & Warnings

• The issuer of the CEF may charge you an annual management fee. This fee, in addition to the fees from when you buy the closed-end ETF, can make these investments expensive to maintain.
• While they have some traits of mutual funds, CEFs are not redeemable from the issuer and may be hard to sell. The company has no obligation to buy the shares back, and you'll have to sell them on the open market.