Why Closed-End Funds?
 

Closed-end funds offer investors numerous ways to generate capital growth and income through portfolio performance, dividends, distributions and judicious trading. Like open-end mutual funds, closed-end funds are professionally managed investment vehicles that provide  diversification, liquidity and economies of scale for investments of all sizes. However, while closed-end funds share many similarities with open-end mutual funds, we believe they also offer many advantages over their more well-known counterparts.

Exchange Traded.  Unlike mutual funds, closed-end funds trade as stocks on the various exchanges. Today there are well over 600 closed-end funds, with $170 billion in assets, listed on exchanges across the country. In fact, about 13% of securities listed on the New York Stock Exchange are closed-end funds.

Trading Flexibility. Both mutual funds and closed-end funds have a net asset value (NAV) that reflects the current valuation of their portfolio holdings. Since mutual funds are not exchange-traded, they can only be bought or sold at NAV. Closed-end funds, on the other hand, also have bid and ask prices and can be purchased or sold at any time during the trading day at their current market price.

Discount Potential. As with stocks, the market price of a closed-end fund at any point in the trading day is based on supply and demand. As a result, shares may sell at a price that is higher or lower than the NAV. While some closed-end funds trade at a premium above NAV, many others trade at a discount, sometimes as much as 15%-20%, below NAV. The premium or discount fluctuates with market conditions and can change rapidly as investors' perceptions of the market change.

Return Opportunities. This flexibility in pricing, which is not available with open-end mutual funds—even no-loads—offers investors the potential to execute purchases and sales in ways that can take advantage of the disparities that often occur between the market price and the fund’s NAV. It can also provide opportunities to dramatically improve returns, sometimes with reduced risk.

Stability. Unlike open-end mutual fund managers, closed-end fund managers are responsible for a stable pool of capital—while the shares trade actively, no assets flow into or out of the closed-end portfolio. Closed-end funds generally don't have to sell securities to meet redemptions in a down market or to invest incoming cash at rising prices in a bull market. As a result, closed-end managers can make investment decisions without the pressures of dealing with constant fund cash flow considerations.

For more information about closed-end funds, visit the Closed-End Mutual Fund Trade Association (CEFA), of which SIA is a "partner."

Closed-end funds of all types should be considered as part of an overall investment portfolio strategy. They are not suitable for every investor. Closed-end funds fluctuate with market conditions and can lose money. Before investing in closed-end funds, investors should, as with any investment, consider the risks and the liquidity of the underlying securities.