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Closed-End Funds Vs. Mutual (open-end) Funds and Exchange Traded Funds (ETFs), & CEF Primary Groupings Overview

January 2, 2012

How do they differ than Mutual funds (or Exchange traded Funds)?

A closed-end fund is a publicly traded investm

    ent company that invests in a variety of securities, such as stocks and bonds. The fund raises capital primarily through an initial public offering (IPO). CEF shares and the proceeds are invested according to the fund’s investment objectives. “Closed” refers to the fact that, once the capital is raised, there are typically no more shares available from the fund sponsor and the issuance of new shares is closed to investors.

After the IPO, most closed-end funds are listed on a national exchange, where the fund’s shares are purchased and sold in transactions with other investors, not with the sponsor company itself. When an investor wishes to purchase or sell shares of a closed-end fund, the investor finds buyers or sellers on an exchange such as the New York Stock Exchange (NYSE) or the NASDAQ, just like a stock.

But unlike a stock, the typical closed-end fund represents a strategy with an actively managed selection of holdings. These investments in securities collectively add up to a value, known as its Net Asset Value (NAV), that may be different from the fund’s market price. The market price is determined by market demand and supply, not the fund’s net asset value.

Although the outstanding shares of a closed-end fund remain relatively constant, additional shares can be created through secondary offerings, rights offerings or the issuance of shares for dividend reinvestment. Currently Investment Company Institute Statistics show $236.7 Billion in closed-end investment companies, as of August 31, 2011. Through December 16th, 2011 there have been $6.001 Billion in New CEF IPOs.

There are 5 main groups of CEFs

  • US Equity Funds (53 Funds or 8.5%) – AVE Distribution Yield 7.2% Annualized
  • Non US Equity Focused Funds (64 Funds or 10.3%) – AVE Dist Yield 6.1% Annualized
  • Specialty Equity Funds (102 Funds or 16.3%) AVE Dist Yield 7.3% Annualized
  • Taxable Bond Funds (152 Funds or 24.3%) AVE Dist Yield 8.1% Annualized
  • Muni (Tax-Free) Bond Funds (105 Funds National or 16.8% / 150 Funds State Specific or 24.0%) 40.7% total AVE Dist Yield 6.3%/5.9% Annualized


Advantages of CEFs

Only fund structure that allows for leverage (preferred share class, credit line etc). This helps the fund increase yield to shareholders, as state above.
Control in execution, using limit order and stop orders – good-til-canceled can plan you entry and exit vs Mutual funds in which everyone pays the same price each day.

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