What Is a Closed-End Fund?
Closed-End Funds Explained
A closed-end fund is a type of investment vehicle that is similar to a mutual fund. The key difference between a closed-end fund and an open-end fund like a mutual fund or exchange-traded fund (ETF)—and what gives a closed-end fund its name—is that a closed-end fund is created with a fixed number of shares that investors trade on the open market rather than redeeming them with the fund company.
Here’s what a closed-end fund is and how it works, plus the similarities and differences between closed-end funds and other types of investment company structures.
Definition and Examples of Closed-End Funds
A closed-end fund is a type of investment company that, like other investment companies, pools investor contributions together to buy a mix of securities such as stocks and bonds. The closed-end fund’s managers will make investment decisions in accordance with the stated investment objectives of the fund.
- Acronym: CEF
Like mutual funds, closed-end funds can have a variety of objectives. Examples include BlackRock’s Core Bond Trust (BHK) that seeks to “provide current income with the potential for capital appreciation.” Another example is PIMCO’s Municipal Income Fund (PMF), which seeks current income that is exempt from federal income tax.
How Closed-End Funds Work
Unlike the more popular mutual fund, closed-end funds do not normally buy back shares from investors that wish to sell. Closed-end funds sell their shares to investors in an initial public offering (IPO) and then investors that want to sell their shares do so on the open market, similar to the way a stock is traded.
Because closed-end fund shares are not redeemed with the fund company, the share price is determined in the open market and may be different from the value of the securities that make up the fund.
Types of Closed-End Funds
There are many different types of closed-end funds, defined by their investment style or objective. For example, there are closed-end funds that primarily invest in municipal bonds in order to generate tax-free income for investors. Closed-end funds may also focus on taxable, fixed-income investments like corporate bonds, or in specific equity classes such as domestic, foreign, or even specific sectors. For example, the Cohen & Steers Quality Income Realty Fund (RQI) focuses on real estate securities, with an investment objective of current income and capital appreciation.
Alternatives to Closed-End Funds
Mutual funds and ETFs are similar to closed-end funds and offer many of the same features. If you’re thinking about investing in a closed-end fund, consider mutual funds and ETFs, as well.
Mutual funds and ETFs are open-end funds and offer the same diversification advantages as closed-end funds in that the fund will invest in a broad number of securities—usually more than what you could do on your own as an individual investor, especially if you are just starting out and don’t have a lot of money to invest at once. ETFs and mutual funds may also have lower expense ratios than closed-end funds, which may make them more affordable to new investors. For example, the Cohen & Steers Quality Income Realty Fund (RQI) has a managed assets expense ratio of 1.63%, while the Vanguard Real Estate ETF (VNQ) has an expense ratio of 0.12%.
Mutual funds and ETFs also have stated investment objectives that you can compare to your own to help you select the funds that will best help you achieve your goals.
Closed-End Funds vs. ETFs
|Trade throughout the day||Trade throughout the day|
|Expenses include commission and are ongoing, and tend to be higher||Expenses include commission and are ongoing, and tend to be lower|
|Pricing departs from net asset value||Pricing is at or close to the net asset value|
|Actively managed||Often passively track an index’s performance|
Pros and Cons of Closed-End Funds
- Diversification: Because closed-end funds invest in many different securities, your risk is diversified. Usually, no single investment’s loss will be enough to create a large impact on the portfolio.
- Professional management: A dedicated management team will monitor the fund and make adjustments to the fund as needed to keep it in line with the fund’s stated investment objectives.
- Continual trading: Rather than having to wait to redeem shares with the fund company at the end of the day like a mutual fund, a closed-end fund can be traded during the day.
- Price volatility: Because the shares trade on the open market, their prices are influenced by how the market values them, rather than their net asset value like with a mutual fund or ETF. This means the share price can be higher or lower than the value of the fund’s underlying investments, adding an additional element of risk.
- Higher expenses: Like other investment companies, closed-end funds incur operating expenses to manage the fund. These expenses are ongoing and expressed a percentage of the fund’s assets. They may be higher than other investment vehicles’ expenses, too, which may not make them as easily accessible or affordable for beginner investors.
Should I Invest in Closed-End Funds?
Closed-end funds may be an appropriate investment for individual investors. But as with any investment, make sure you understand what you’re investing in, and only use money you can afford to lose. Remember, if a closed-end fund doesn’t seem right for you, you may opt to invest in mutual funds or ETFs instead.
Always read the fund’s prospectus to find out if its investment objectives, fees, and risk are right for you and align with your investment goals.
How to Invest in Closed-End Funds
Closed-end funds can be purchased through most brokerage firms, both traditional and online.
If you work with a professional investment advisor, they can also help you decide if you should invest in closed-in funds and pick some that are a good fit for you and your portfolio.
If you manage your own investments, browse the available closed-end funds at your brokerage firm. You may have access to a screener that could help you sort the options and narrow down your selection.
- A closed-end fund is a type of investment company that shares many similarities with mutual funds and ETFs.
- The primary difference is that closed-end funds are not redeemable with the issuer, and the price may vary from the value of the underlying investments.
- Closed-end funds are professionally managed and trade throughout the day on an exchange.
- There are many types with different investment objectives that can provide diversification.
- Closed-end funds may or may not be appropriate for individual investors depending on their needs and goals.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.