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.