You might be using an unsupported or outdated browser. To get the best possible experience please use the latest version of Chrome, Firefox, Safari, or Microsoft Edge to view this website. Closed-end funds are investment vehicles that bear a passing resemblance to mutual funds and exchange-traded funds ETFs.
All three fund types are pooled investments that sell shares to investors and use the proceeds to build a broadly diversified portfolio of assets. But the similarities between closed-end funds and their mutual fund and ETF brethren end there. Unlike ETFs or mutual funds, outside investors buy and sell the shares of closed-end funds on the secondary market.
Mutual funds and ETFs are open-ended funds. Most closed-end funds are listed on the New York Stock Exchange NYSE or the Nasdaq , where they are actively traded until the fund reaches its objective, liquidates itself and returns capital to its investors. Open-ended funds have no limit on the number of shares they can issue, and capital flows into and out of the funds freely as new shares are issued and repurchased.
As a result, mutual funds and ETFs provide greater liquidity than closed-end funds. But this also requires open-ended funds to hold cash in order to buy back investor shares if need be, which prevents them from fully investing all of their assets at any given time. This also lets them invest in less liquid asset categories and deploy leverage. Leverage in particular can be a risky investment strategy as it can magnify results, both positively and negatively.
But shares of closed-end funds are less liquid, as your ability to sell is limited by available market demand. The NAV of a mutual fund tends to be identical to its share price, since mutual fund shares are not directly traded on an exchange. Every day, management issues and repurchases shares to balance the NAV. This means, practically speaking, you may be able to buy shares of closed-end funds at a premium or discount.
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Closed-end funds are one of two major kinds of mutual funds, alongside open-end funds. Since closed-end funds are less popular, they have to try harder to win your affection. They can make a good investment — potentially even better than open-end funds — if you follow one simple rule: Always buy them at a discount. Like many siblings, these two are as different as they are alike. A closed-end fund, or CEF, is an investment company that is managed by an investment firm.
Closed-end funds raise a certain amount of money through an initial public offering , or IPO, after which it can list shares on a stock exchange. Like mutual funds and ETFs, closed-end funds invest in a basket of securities. A closed-end fund is not a traditional mutual fund or exchange-traded fund. Open-end funds, such as mutual funds or ETFs, take in money from new investors, issue additional shares and buy back shares when investors are looking to sell.
In contrast, closed-end funds offer a particular number of shares after raising a fixed amount of money through an IPO. Learn about ETFs. Open-end funds can sell as many shares to investors as they want. Then, the fund puts that money to work by buying new securities — stocks or bonds, for example. Open-end funds are common in employer-sponsored k plans because their expenses tend to be lower. In contrast, a closed-end fund sells a fixed number of shares during its IPO and never reopens the fund to sell more.
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