Closed-End Fund

What Is a Closed-End Fund?

Closed-end funds have been around since 1893, more than 30 years before the first mutual fund (also known as an open-end fund) was created in the United States. However, closed-end funds are much less common than open-end funds. There are fewer than 600 closed-end funds on the market, whereas there are about 8,000 mutual funds available.1

Closed-end funds are similar to open-end mutual funds in that investors pool their money together to purchase a professionally managed portfolio of stocks and/or bonds. Both have dividends and capital gains that are distributed annually. In other ways, they are very different. For example, closed end funds are much less common than open end funds. Also, closed-end funds have more in common with stocks or exchange-traded funds (ETFs), but they are actively managed.

Closed-end funds have an initial public offering (IPO) with a fixed number of shares to sell to investors. After that point, the investment company usually does not deal with the public directly, and investors who want to purchase shares must do so on a secondary market, such as the New York Stock Exchange. A closed-end fund’s investment portfolio is generally managed by a separate entity known as an “investment adviser,” that is registered with the Securities and Exchange Commission.

Shares are bought and sold on the open market, creating a situation in which investor activity does not significantly impact decisions on handling the funds. The market price of closed-end fund shares trading on a secondary market is determined by supply and demand, not by the shares’ net asset value (NAV). Although closed-end funds start with a NAV, the trading price may be higher or lower than that value. If the price is higher, shares are selling at a “premium.” If the price is lower, they are selling at a “discount.”

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