Loading the player...

What is a 'Closed-End Fund'

A closed-end fund is organized as a publicly traded investment company by the Securities and Exchange Commission (SEC). Like a mutual fund, a closed-end fund is a pooled investment fund with a manager overseeing the portfolio; it raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.

BREAKING DOWN 'Closed-End Fund'

A closed-end fund is also known as a "closed-end investment" or "closed-end mutual fund." While a closed-end fund has several unique characteristics that distinguish it from an open-end fund, such as a mutual fund or exchange-traded fund (ETF), it also shares several similarities. A closed-end fund raises a prescribed amount of capital only once through an IPO by issuing a fixed number of shares, which are purchased by investors in the closed-end fund as stock. Unlike regular stocks, closed-end fund stock represents an interest in a specialized portfolio of securities that is actively managed by an investment advisor, and typically concentrates on a specific industry, geographic market or sector. The stock price of a closed-end fund fluctuates according to market forces, such as supply and demand, as well as the changing values of the securities in the fund's holdings. One of the largest closed-end funds is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund.

Other Differences and Similarities Between Closed-End and Open-End Funds

Both closed-end funds and open-end funds are run by a management team that manages a portfolio of investments. Both also charge an annual expense ratio and can make income and capital gain distributions to shareholders.

Unlike open-end funds, closed-end funds trade just like stocks. While open-end funds are priced only once at the end of the day, closed-end funds are traded and priced throughout the day. Closed-end funds also require a brokerage account to buy and sell, while an open-end fund can often be purchased directly through a fund provider.

Discount and Premium to Net Asset Value

One of the unique features of a closed-end fund is how it is priced. The net asset value (NAV) of the fund is calculated regularly. However, the price that it trades for on the exchange is determined entirely by supply and demand. This can lead to a closed-end fund trading at a premium of a discount to its NAV.

Funds can trade at premiums and discounts for a number of reasons. Closed-end funds focused on a popular sector at the time may trade at a premium. These funds may also trade at a premium if the fund is managed by a historically successful stock picker. Conversely, a lack of investor demand or a poor risk and return profile of the fund can lead to it trading at a discount to its NAV.

Examples of Closed-End Funds

The largest type of closed-end fund according to managed assets is municipal bond funds, which invest in bonds of state and local governments and agencies. Managers of these funds often seek to broadly diversify in order to minimize risk, but also often rely on leverage to maximize returns. 

Mutual fund managers build global and international funds with stocks or fixed-income instruments worldwide. These include global funds, which combine U.S. and international securities; international funds, which purchase only non-U.S. securities; and emerging markets funds, which can be highly volatile and less liquid. 

RELATED TERMS
  1. Open-End Fund

    Open-end funds sell shares directly to investors based on their ...
  2. Investment Company

    An investment company is a corporation or trust engaged in the ...
  3. Fund Company

    Fund company is a commonly used term to describe a corporation ...
  4. Closed-End Credit

    Closed-end credit is a loan or extension of credit in which the ...
  5. Premium to Net Asset Value

    Premium to net asset value (NAV) is a situation where the value ...
  6. Open-End Credit

    Open end credit is a pre-approved loan between a financial institution ...
Related Articles
  1. Investing

    Closed-End vs. Open-End Funds

    Open-end products may be a safer choice than closed-end, but closed-end funds might produce a better return.
  2. Financial Advisor

    Why You Should Consider These Closed-End Funds

    Advisors looking to recommend closed-end funds to clients might want to consider ones that have withstood the test of time. Here are a few examples.
  3. Investing

    Closed-End Vs Open-End Funds

    Much like an individual’s wardrobe, many portfolios are collections of separate items. They combine stocks and bonds and other investments into one product.
  4. Investing

    Buying Natural Resources At A Discount

    Recent investor enthusiasm has pushed prices for many assets into bubble territory. By using closed ended funds, investors can buy these assets at a discount.
  5. Investing

    Closing Mutual Funds: Investment Protection Or Trap?

    Discover the characteristics of closing funds, the reasons why they close and key factors to consider.
  6. Investing

    How to Create Tax-Free Bond Portfolios

    Information to help you decide how to invest in municipal bonds, including mutual funds, individual bonds, ETFs and SMAs.
  7. Retirement

    How to Retire with Just $500,000 Saved

    Here are three types of investments that can help generate a higher level of retirement income than Treasury securities without taking excessive risks.
  8. Investing

    ​​​​​​​Muni Bond Fund Trio: Tax-Free Income at a Discount

    The IRS tax code provides an exclusion for municipal bonds, allowing most U.S. investors to collect interest payments from them tax-free; and in many states, income from those bonds is exempt ...
  9. Investing

    Liquidation Blues: When Mutual Funds Close

    Underperforming mutual funds can be liquidated, leaving investors down and out.
RELATED FAQS
  1. What is the difference between closed-end credit and a line of credit?

    Understand the difference between closed-end credit, open-end credit, and lines of credit. Then find out how each are used ... Read Answer >>
  2. What Was the First Mutual Fund?

    Many trace the creation of the first mutual fund back to Dutch merchant Adriaan Van Ketwich. Read Answer >>
Trading Center