What is a Closed-End Fund?
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Closed-end funds (CEFs) are professionally managed investment companies that generally issue a
fixed number of common shares during an IPO. Once shares are issued, a closed-end fund will
generally not buy or sell additional shares of their fund, but the shares will trade on a secondary
market, such as the New York Stock Exchange or the Nasdaq Stock Market. The market price of
closed-end fund shares fluctuates like that of other publicly traded securities, often times trading
below and sometimes above the net asset value (NAV) of the fund.
There are a number of legal differences between CEFs and Exchange Traded Funds (ETFs), but from an
investor's perspective the primary difference is the fixed number of shares of a CEF. Where the shares
outstanding of an ETF can fluctuate up or down based on investor interest in the fund, this can't happen
with a CEF and, therefore, the price tends to rise and fall with demand in addition to the rise and fall
in the value of the fund's assets. This dynamic is what creates the discount or premium that some CEF investors
focus on.
Other features worthy or note:
1. CEFs commonly utilize leverage with the goal of improving returns.
2. CEFs are allowed by the SEC to hold more illiquid securities because a closed-end fund should never
need to sell securities to meet a stock holder redemption, which is common practice in the case
of open-end type funds.
