A common misunderstanding is that a closed-end fund (CEF) is a traditional mutual fund or an exchange-traded fund (ETF). A closed-end fund is not a traditional mutual fund that is closed to new investors. And even though CEF shares trade on an exchange, they are not exchange-traded funds (ETFs).
CEFs share some traits with traditional open-end mutual funds
- Both have an underlying portfolio of investments with a net asset value
- Both are run by a professional management team
- Both have expense ratios and, typically, fee schedules
- Both may offer distributions of income and capital gains to investors
However, traditional mutual funds issue and redeem shares daily, at the end of business, at the fund's net asset value. CEFs do not issue or redeem shares daily. Instead, CEF shares trade on an exchange intraday, like stocks. The share price for a CEF is set by the market. The share price only rarely, and by sheer coincidence, equals the CEF's net asset value. Also unlike traditional mutual funds, CEFs may issue debt and/or preferred shares to leverage their net assets. That leverage can increase distributions (income) but also increases volatility of the net asset value.
CEFs share some traits with ETFs
- Both have an underlying portfolio of investments with a net asset value
- Both trade during the day on exchanges
- CEF and ETF shares can be treated very much like a stock, in that you can set limit orders, short the shares, and buy on margin
- The portfolios may be leveraged
- Both have expense ratios and, typically, fee schedules
- Both may offer distributions of income and capital gains to investors
ETFs have a redemption/creation feature, which typically ensures the share price doesn't stray significantly from the net asset value. As a result, an ETF's capital structure is not closed. CEFs do not have such a feature. CEFs achieve leverage through issuance of debt and preferred shares, as well as through financial engineering. ETFs are precluded from issuing debt or preferred shares. ETFs are structured to shield investors from capital gains better than CEFs or open-end funds are.
Key takeaways
|
Traditional mutual funds |
ETFs |
CEFs |
|
|
Pricing |
Once a day at 4 p.m. |
Intraday |
Intraday |
|
Purchase accessibility |
Varies by platform |
High-any broker |
High-any broker |
|
Portfolio transparency |
Low |
High |
Low |
|
Listed options |
No |
Yes |
Some |
|
Continuously offered |
Yes |
Yes |
No |