What is Closed-End Fund?

A closed-end fund (CEF) is a portfolio of pooled assets that raises a fixed amount of capital through IPO and then lists shares for trade on a stock exchange.
  • Similar to a mutual fund, a closed-end fund has a professional manager overseeing the portfolio and actively buying and selling holding assets.
  • ​Similar to an exchange-traded fund (ETF), it trades like equity, as its price fluctuates throughout the trading day.
  • The closed-end fund is unique in that, after its IPO, the fund's parent company issues no additional shares.
  • Without a liquidation event, a closed-end fund will not buy back shares. The fund can only be bought or sold on the secondary market by investors.

WHY CAN Closed-End Fund YIELD BETTER THAN 4%?

Most CEFs pay distributions on a monthly or quarterly basis. In many cases, CEF distribution rates exceed those of comparable investment vehicles such as mutual funds.
Leverage is a strategy that can be employed by CEFs in an effort to achieve a higher rate of distributable income and potentially enhance returns. Although there are several potential benefits of using leverage, investors should consider the potential for increased risk and volatility prior to investing in a leveraged CEF.
According to a study done by BlackRock, CEFs may offer higher distribution rates than comparable investment vehicles such as mutual funds as shown below.

HOW TO INVEST IN Closed-End Fund BY YOURSELF?

  • A closed-end fund’s manager can invest without worrying that cash may be needed to meet sudden redemptions by large numbers of jittery investors, as is the case with open-end fund managers.
  • Closed-end funds tend to pay investors higher levels of income because they invest more heavily in income-producing assets with or without using leverage.
  • A closed-end fund’s discount offers you some margin of safety in case of liquidation when the gap between the share price and NAV narrows after investment.
  • Closed-End Fund Selection
  • Multi-Asset ETFs​
CEFConnect provides unbiased, straightforward, and comprehensive closed-end fund information. 

Pros:

  • CEFs are typically listed on a major exchange such as the New York Stock Exchange which provides the benefit of intra-day liquidity for investors.
  • The “closed” structure allows portfolio managers to access a broader opportunity set including less liquid investments that offer higher income and return potential.
  • CEFs can borrow money to increase exposure to investments with the goal of enhancing income and capital appreciation potential.

Cons:

  • Often due to limited liquidity caused by low trading volume, closed-end funds are subject to more volatile market movements than open-ended mutual funds.
  • Changes in interest rate levels can directly impact income generated by a CEF. Funds that have a portfolio with leverage to enhance income distribution are more exposed to principal risk as interest rates change.
  • While a CEF's income distribution rate may be attractive, its underlying positions may have lower yield than the distribution rate. This could deplete the principal over the long term and trigger eventual liquidation of the CEF at certain future date.
  • CEFs often have higher hidden fees than ETFs because they are actively managed and may use leverage.