Focus on income. Many CEFs are designed with the primary goal of providing income. Income-focused CEFs pay out monthly or quarterly dividends, potentially providing an attractive stream of income to investors. Investors can choose to receive dividend payments or have them reinvested in the fund through a dividend reinvestment program. Over time, reinvested dividends can potentially help drive total return through the power of compounding.
What is a Closed-End Fund?
A closed-end fund is a professionally managed investment company that pools investors’ capital during an IPO period and invests in stocks, bonds, or other securities according to an overall investment objective. After the IPO period, closed-end funds trade on an exchange like a stock or an ETF.
Closed-End Funds Offer Opportunities for Attractive Income and Capital Appreciation
Closed-end funds provide exchange-traded flexibility, income potential, ability to tap into specialized asset classes, and lower investment minimums. Like a traditional open-end mutual fund, a closed-end fund is a professionally managed investment company that pools investors’ capital and invests in stocks, bonds or other securities according to an overriding investment objective. But they differ from open-end funds in several significant ways:
Exchange-traded. CEFs look like open-end funds, but trade like stocks. A CEF raises a fixed amount of capital at inception through an initial public offering (IPO). After the IPO, shares of the fund change hands on an exchange (such as the New York Stock Exchange) just like the stocks of individual companies. When an investor wants to buy or sell shares of a CEF, the investor trades with other buyers or sellers on the exchange, instead of with the sponsor company.
Pricing. Because it’s traded on an exchange, a CEF’s price is determined by market supply and demand. While open-end funds are bought and sold based on the fund’s net asset value (NAV) per share less any applicable sales charges, the price at which a CEF is bought or sold may be higher or lower than its NAV. A CEF trades at a premium when its market price is higher than NAV; when the market price is lower than NAV, the CEF trades at a discount.
Benefits of Investing in Closed-End Funds
Attractive income potential
The potential to generate income is largely what makes CEFs attractive. Some CEFs may leverage their investment position with the goal of enhancing distribution and total return. This can be accomplished by borrowing to purchase additional portfolio securities that it believes will generate a higher rate of return than the cost of the borrowed securities. Note that the amount a CEF can leverage is usually restricted to no more than 33.33% of its total assets.
Efficient management
A CEF’s capital and number of shares outstanding are fixed once it completes its IPO. That means managers are able to remain fully invested at all times without worrying about having enough cash on hand to meet redemptions from investors who suddenly sell — especially in a down market. Conversely, in a rising market, CEF managers don’t need to invest a flood of new cash at rising prices.
Ability to tap into specialized asset classes
Their stable capital structure makes CEFs particularly ideal for investing in niche, less liquid markets that may be ill-suited for other investment structures. CEFs can also invest in asset classes that may be otherwise unavailable to retail investors, or in some cases greatly simplify the way investors can access a particular asset class, such as master limited partnerships (MLPs).
Lower investment minimums
CEFs do not have minimum investment requirements, if purchased on the secondary market. As long as an investor is willing to purchase a single share, an investor can buy into the fund. And because they trade on an exchange, closed-end funds do not have ongoing distribution costs, such as 12b-1 fees.¹ Individual brokerage requirements may vary.
How Do You Invest in a Closed-End Fund?
Carefully consider the objectives, risks and expenses of the particular fund before investing. A CEF can be purchased two ways:
- During its IPO, through a participating firm. You will pay a sales charge on your overall investment in an IPO.
- In the secondary market, you can access CEFs through your financial advisor or trading platform, like any company that is listed on an exchange; purchases on the secondary market may be subject to transaction fees or other costs.
We manage a comprehensive lineup of closed-end funds that targets compelling investment opportunities across fixed income, equity and specialty sectors. Closed-end funds can provide opportunities for investors seeking attractive distributions and capital appreciation.Here are changes that should be made to the page regardless:
1 Other fees and expenses will apply to the purchase and ongoing ownership of a CEF. These fees and expenses include sales charges, management fees, operating expenses, and, if applicable, interest expense. Brokerage commissions may be assessed by your broker to purchase or sell CEF shares.