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Closed-end funds vs. mutual funds and ETFs

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  • Closed-End Funds
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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 do 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 also 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 are actively managed, whereas most ETFs are designed to track an index's performance. 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

Management Type

Active

Passive

Active

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©2012 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Article copyright 2012 by Morningstar, Inc. Reprinted with permission from Morningstar, Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.

Closed end funds may trade at a discount (or premium) to their NAV and are subject to the market fluctuations of their underlying investments. Shares of closed end funds frequently trade at a market price that is a discount to their NAV. Closed end funds are subject to management fees and other expenses.

The Closed End Fund Screener may include closed end funds not registered under the Investment Company Act of 1940

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