What are closed-end funds? | GOBankingTariffs

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The difference between closed end funds and open end funds is quite simple. This is whether there is a fixed number of shares or whether the fund creates new shares as more and more people subscribe to it.

The vast majority of mutual funds and exchange-traded funds (ETFs) available to retirement investors are open-end funds, but you may find that some closed-end funds can play an important role in your portfolio.

What is a closed-end fund?

A closed-end fund is a fund that offers a fixed number of shares. Like other ETFs and mutual funds, a closed-end fund is made up of a pool of securities and can offer investors an easy way to build a fully diversified portfolio. However, after an initial public offering, the only way to get into the fund is to buy shares from someone else, just like you would a stock.

Closed-end funds are actively managed and a professional investment manager decides what goes into the fund. Essentially, they operate like publicly traded investment companies, reporting their assets quarterly and letting investors decide whether they like what they see in terms of the numbers.

Asset managers managing closed-end funds have more flexibility in many ways, including the ability to borrow money against fund assets as leverage to make more investments.

Many closed-end funds focus on a particular region or segment of the financial market, so you might find it useful to use them to balance some of the risk elsewhere in your portfolio.

Advantages The inconvenients
Asset managers can use leverage to increase returns Actively managed FECs can have higher expense ratios than passively managed funds
Can offer higher yields Generally carry more risk

What are examples of closed-end funds? Here are a few:

  • Eaton Vance Tax-Managed Global Diversified Equity Income (EXG)
  • AllianceBernstein Income Fund (ACG)
  • DNP Select Income Fund Inc. (DNP)
  • Nuveen Municipal Value Fund Inc. (NUV)
  • Aberdeen Asia-Pacific Income Fund Inc. (FAX)

What is an open-ended fund?

Unlike a closed-end fund, an open-ended fund will create or destroy as many shares as needed to meet demand. When you buy into an open-end fund, the asset manager will use the money you paid for those shares to buy more of the assets that make up the fund.

This action helps the fund maintain the original proportions of these assets and ensures that the net asset value of the fund matches its daily price. This is particularly different from a closed-end fund, where stock prices can rise above or fall below the net asset value of the fund.

Open-end funds do not trade continuously throughout the day like closed-end funds or ETFs. Instead, open funds are “marked to market” at the end of each trading day. Therefore, if you want to buy, you have to wait until the end of the trading day to see what the new stock price will be.

Advantages The inconvenients
No risk of the market value of the fund trading below the net asset value No Possibility of Market Value Exceeding Net Asset Value
Mark-to-market — meaning the stock price is always the net asset value Can only be redeemed once per day

What is an example of an open fund? Here is a list:

  • Loyalty counter-funds (FCNTX)
  • American Funds Growth Fund of America (AGTHX)
  • Fidelity 500 Index Fund (FXAIX)
  • Fundamental Investors in US Funds (ANCFX)
  • Vanguard 500 Index Fund (VFINX)

Differences between Closed Ended and Open Ended Funds

What is the difference between closed and open funds? Here’s a quick breakdown:

Open funds Closed-end funds
Share price Marked to market at the end of each trading day to reflect net asset value Defined by supply and demand in the free market
Leverage Limited to proportions of fund assets Can take on more risk and borrow against assets to increase returns
Total number of shares Expands and contracts as investors buy and sell stocks Fixed at IPO and does not change
Seller Shares purchased directly from the fund management company Shares must be purchased in the IPO or from another investor
Trade Stocks trade at the end of the day, after the stock price is marked to market Shares trade continuously throughout the trading day
Minimum investment Many open-end funds will include a minimum level of investment needed to buy into the fund Single Stock Price

Choosing Open-End Funds Over Closed-End Funds

Overall, a fund run by a company that consistently beats its benchmark is a solid investment – ​​whether open or closed – and a fund run by a company that consistently underperforms is not. So, opting for an open-end or closed-end fund is more a question of what options are available.

Focus on the fund’s underlying assets and how they will fit into your portfolio, and assess how high the fees are and whether the fund’s performance justifies paying them. If a particular fund offers a unique combination of assets that perfectly complements your portfolio, it makes sense to buy.

Summary

Understanding the difference between an open-ended fund and a closed-end fund is important, especially for investors looking for mutual funds. However, things like the objective of the fund, the fund manager and the underlying assets will all be more important considerations than whether or not the number of shares is fixed.

Getting a fund that will beat – or at least match – market returns while complementing the other assets in your portfolio should be the primary goal.

John Csiszar contributed reporting for this article.

Our in-house research team and on-site financial experts work together to create accurate, unbiased and up-to-date content. We verify every statistic, quote and fact using trusted primary resources to ensure that the information we provide is correct. You can read more about GOBankingRates processes and standards in our Editorial Policy.

About the Author

Joel Anderson is a business and finance writer with over a decade of experience writing about the broad world of finance. Based in Los Angeles, he specializes in writing about financial markets, stocks, macroeconomic concepts and focuses on helping to make complex financial concepts digestible for the retail investor.

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