About Closed-End Funds
Closed-end fund shares are not redeemable, but instead are traded in the secondary market on an exchange such as the New York Stock Exchange or the NASDAQ. They frequently trade at a discount to net asset value. Specialized funds may carry additional risks.
Closed-End Funds Q&A
Q: What is a closed-end fund?
A: A closed-end fund is an investment company that issues a fixed number of shares through an initial public offering (IPO). The combined assets are professionally managed and contain a portfolio of securities. After the IPO, closed-end fund shares trade in the secondary market, either on an exchange or on the over-thecounter market, much like a stock. The trading price of the fund's shares is determined by its market price, not by the fund's net asset value (NAV).
Q: What is the difference between a closed-end fund and an open-end fund?
A: Open-end funds continuously sell and redeem shares for investors. Closed-end funds sell a fixed number of shares once, in an initial public offering. Closed-end fund shares cannot be redeemed directly, only sold in a secondary market, typically the NASDAQ or NYSE. Open-end fund share prices are determined by the fund's net asset value (NAV) and are calculated at the end of each business day. Closed-end fund share prices fluctuate throughout the day, as they are driven by market price, which is determined by supply and demand on a stock exchange.
Q: What is the difference between a closed-end fund and an open-end fund that is closed?
A: Closed-end funds initially issue a fixed number of shares, which are then bought and sold in the secondary marketplace. Closed funds are open-end funds that no longer allow new investors into the fund. This often happens when assets become too large to manage.
Q: What is the difference between net asset value (NAV) and market price?
A: Per share net asset value (NAV) is the current value of all the fund's assets (less liabilities), divided by total shares outstanding. Market price is the price an investor pays or receives when they purchase or sell shares of a closed-end fund. Again, this price is determined by supply and demand for the closed-end fund on a stock exchange.
Q: What does it mean when a fund trades at a discount or premium?
A: A premium occurs when the market price of a closed-end fund share is more than its net asset value (NAV). Conversely, a discount occurs when the market price of a closed-end fund share is less than its NAV. Since investors receive capital gains and dividend distributions on a per share basis, purchasing closed-end fund shares at a discount presents a unique opportunity for investors to receive a higher yield on their investment. Investors also benefit from buying shares at a discount when purchasing a set number of shares, because their cost is lower. In addition, when investors have a set dollar amount to invest, they get more shares when they buy at a discount.
Q. What causes the market price of a closed-end fund to increase or decrease?
A: The market price of a closed-end fund may fluctuate based on supply and demand in the marketplace. There are many factors that determine the market price, including overall market perception of the fund's underlying securities, market activity in specific regions or sectors in which the fund invests, interest rate moves, world news and events, tax legislation, news or issues relating to portfolio management, fund performance, net asset value and dividend and capital gain distributions.
Q. How can an investor purchase or sell closed-end fund shares?
A: Investors can purchase or sell closed-end fund shares in the secondary market, either on an exchange or on the over-the counter market, like those of any individual stock. Investors are typically required to pay a brokerage fee for the purchase and sale of closed-end fund shares, much like those of a stock.
Q. What is investment leverage?
A: Investment leverage is borrowing assets to purchase additional securities. The expectation is that the borrowing costs will be lower than the earnings generated from the additional securities purchased with the leverage proceeds. This technique creates an opportunity for closed-end funds to generate additional income to common shareholders with the potential for greater yields and total return. Generating extra income can be achieved as long as the fund earns rates that are greater than the rate it is required to pay out. One form of investment leverage involves the issuance of preferred shares. The fund takes the proceeds from the issuance and invests in higher-yielding, dividend-paying securities as compared with the lower dividend payments it is required to pay its preferred shareholders. If the performance of the capital contributed by the preferred shares fails to cover its respective dividends, the value of the common shares may decrease and dividends on the common shares could be reduced.
SEC Section 16(a) Filings
Under Section 16(a) of the Securities Exchange Act of 1934, officers and directors of the Funds and the Funds' adviser are required to file beneficial ownership reports with the Securities Exchange Commission. By clicking on a name below, you can view the individual's filing directly from the SEC website.
Key Characteristics
With so many investment choices in the market today, closed-end funds offer investors a unique investing opportunity unlike any other investment vehicle. The chart below compares the characteristics of closed-end funds with those of open-end mutual funds. There is no disputing that open-end funds have their own merits; however, closed-end funds offer investors the option to further diversify with a product unlike any other.
Discount Benefits
| Higher yields based on distributions | |||
| Share Price | Dividend | Yield | |
| Investor A (with discount) | NAV of 20% discount = $8 per share |
$1.00 | 12.5% |
| Investor B (without discount) | $10 per share | $1.00 | 10.00% |
| Maximized purchasing power | |||
| Share Price | Total cost of $11,000 shares | Cost benefit | |
| Investor A (with discount) | NAV of $10 20% discount = $8 per share |
$8,000 | $2,000 |
| Investor B (without discount) | $10 per share | $10,000 | |
| Greater earning potential by obtaining additional shares | |||
| Share Price | Total cost of $10,000 shares | Additional shares | |
| Investor A (with discount) | NAV of $10 20% discount = $8 per share |
$1,200 | 250 |
| Investor B (without discount) | $10 per share | $1,000 | |
| Closed-End Fund | Open-End Fund | |
| Asset Based |
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| Liquidity |
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| Opportunity to invest at "bargain" prices |
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| Leverage potential |
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| No purchase requirements |
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