Like any stock or ETF, its shares fluctuate in price throughout the trading day. However, the closed-end fund's parent company will issue no additional shares, and the fund itself won't buy back shares. Closed-end funds and open-end mutual funds have many similarities. Both make distributions of income and capital gains to their shareholders.
Both charge an annual expense ratio for their services. Closed-end funds differ from open-ended funds in fundamental ways. As noted, a closed-end fund raises a prescribed amount of capital in a one-time offering of a fixed number of shares. Once the shares are sold the offering is "closed. Most mutual funds and exchange-traded funds constantly accept new investor dollars, issuing additional shares, and redeeming—or buying back—shares from shareholders who wish to sell.
A closed-end fund lists on a stock exchange where the shares trade just like stocks throughout the trading day. Open-end mutual funds price their shares only once a day, at the end of the trading day, basing the price on the net asset value of the portfolio.
The stock price of a closed-end fund fluctuates according to the usual forces of supply and demand and the changing values of the fund's holdings. Because they trade exclusively in the secondary markets, closed-end funds require a brokerage account to buy and sell. Open-end funds can usually be purchased directly through the fund's sponsoring investment company.
Its pricing is one of the unique characteristics of a closed-end fund. The NAV of the fund is calculated regularly, based on the value of the assets in the fund. However, the price that it trades for on the exchange is market-driven. This means that a closed-end fund can trade at a premium or a discount to its NAV.
There are several reasons for this. A fund's market price may rise because it is focused on a sector that is currently popular with investors, or because its manager is well regarded among investors.
Or, a history of underperformance or volatility may make investors wary of the fund, driving down its share value. Closed-end funds do not repurchase their shares from investors. That means they don't have to maintain a large cash reserve level, leaving them with more money to invest.
They can also make heavy use of leverage—borrowed money—to boost their returns. As a result, closed-end funds may be able to offer higher overall returns than their open-fund mutual fund counterparts. The largest type of closed-end fund, as measured by assets under management, is the municipal bond fund.
These large funds invest in the debt obligations of state and local governments and federal government agencies. Managers of these funds often seek broad diversification to minimize risk, but also may rely on leverage to maximize returns.
Managers also build closed-end global, international funds, and emerging markets funds that mix stocks and fixed-income instruments. Global funds combine U.
International funds purchase only non-U. Emerging markets funds focus on fast-growing and volatile foreign sectors and regions. The primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation. You have two potential ways to make money with a closed-end fund: You can enjoy the income or growth that is produced by the fund's investments. In contrast, the number of shares outstanding in a closed-end fund is relatively stable.
A closed-end fund is created by issuing a fixed number of common shares to investors during an initial public offering IPO , although subsequent issuance of common shares can occur through secondary or follow-on offerings, at-the-market offerings, rights offerings, or dividend reinvestment. As a result, closed-end funds may trade at discounts or premiums to the underlying market value of the portfolio.
In addition, closed-end funds, unlike ETFs, may issue debt or preferred shares to raise additional capital to purchase more securities for its portfolio. Note: Total assets is the fair value of assets held in closed-end fund portfolios funded by common and preferred shares less any liabilities not including liabilities attributed to preferred shares.
Closed-end funds are governed by the Investment Company Act of , a law that shapes how all registered investment companies must be structured and operated. All closed-end funds must meet certain operating standards, observe strict antifraud rules, meet diversification requirements, and disclose complete information to investors.
Closed-end funds have the ability, subject to strict regulatory limits, to use leverage as part of their investment strategy. The use of leverage allows a closed-end fund to raise additional capital, which it can use to purchase more assets for its portfolio. The use of leverage by a closed-end fund can allow it to achieve higher long-term returns, but also increases the likelihood of share price volatility and market risk.
Closed-end fund leverage can be classified as either structural leverage or portfolio leverage. Types of closed-end fund structural leverage include borrowing and issuing debt and preferred shares.
The issuance of preferred shares accounts for the majority of closed-end fund structural leverage. Portfolio leverage is leverage that results from certain portfolio investments. Types of closed-end fund portfolio leverage include certain types of derivatives, reverse repurchase agreements, and tender option bonds.
Under the Investment Company Act of , closed-end funds are subject to asset coverage requirements if they issue debt or preferred shares. At year-end , at least funds, accounting for 64 percent of closed-end funds, were using structural leverage, some types of portfolio leverage i.
The net asset value of the common shares and the returns earned by common shareholders will be more volatile in a leveraged closed-end fund than in a fund that does not use leverage. As previously noted, preferred shares are a form of structural leverage that allow a closed-end fund to raise additional capital, which it can use to purchase more securities for its portfolio. Closed-end funds are permitted to issue one class of preferred shares under Section 18 of the Investment Company Act of Preferred shares differ from common shares in three ways:.
Section 18 of the Investment Company Act provides the preferred shareholders with the exclusive right to elect two fund directors. Preferred shareholders also typically vote, together with the common shareholders, to elect the remaining fund directors. In addition, Section 18 provides preferred shareholders with the right to elect a majority of directors if the fund does not pay dividends to the preferred shareholders for a period of two years.
Chat unavailable. Individual Investors. View more contact details. Contact Nuveen. Thank You. Closed-end funds Understanding closed-end fund structures. All closed-end funds CEFs , regardless of their structure, have some basic features in common: They raise investment capital by offering a fixed number of shares through an initial public offering IPO Following the IPO, fund shares trade in the open market on an exchange.
Featured closed-end funds. Past performance does not guarantee future results. Distribution rates represent the latest declared regular distribution, annualized, relative to the most recent market price and NAV. Special distributions, including special capital gains distributions, are not included in the calculation.
Historical distribution sources have included net investment income, realized gains and return of capital. Related articles. Stocks sold off sharply last week, experiencing their worst week since the beginning of the coronavirus crisis in March.
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