ETFs vs. Closed-End: Read the Fine Print

Aside from being the better-diversified fund, the Brazil CEF also substantially outperforms the ETF when judged over a longer period. Over the past five years, the CEF has returned an average of 20.21% annually, over 11 percentage points higher than the ETF.

Don Cassidy, fund strategist at Lipper, says investors need to take long-term performance, leverage and manager tenure into account when judging a closed-end fund, just as they would when reviewing an open-end mutual fund. (In the case of The Brazil Fund, its manager, Paul Rogers, has been in the position since 1996.)

But he advises short-term investors stick with unmanaged index funds, like ETFs, since the costs are lower. He adds that ETFs also tend to be more tax efficient and do not distribute capital gains to the same extent as actively managed funds.

Porter says he would also defer to a country ETF "in the case of concentrated portfolios which hold the same assets in essentially the same proportions as the CEF." In such cases, Porter says arbitrage opportunities are often created where a trader can sell short the CEF if it sells at a high premium and buy the corresponding ETF to lock in the difference in premiums.

Not all countries have the luxury of both an ETF and a CEF. It's an honor reserved mostly for developed countries with fairly broad and liquid stock exchanges. The institutional buying associated with ETFs to eliminate premiums and discounts would disrupt trading on narrower, less developed exchanges. As a result, smaller countries like Ireland and India are represented by CEFs like The New Ireland Fund (IRL) and The India Fund (IFN), but do not have corresponding ETFs, at least just yet.

For those countries that sport both types of funds, many of the listed closed-end country funds are holding up quite nicely compared to the comparable ETFs. The Korea Fund(KF) has returned 22.5% annually over the past five years, while the iShares MSCI South Korea Index(EWY) ETF is up 13.28% per year. The Spain Fund(SNF) has averaged 11.88% a year since 2000 vs. 8.44% for the iShares MSCI Spain Index(EWP) ETF.

That said, not all closed-end country funds have been hitting home runs over the past five years. The Germany Fund(GER) is down 5.8% annually, while the iShares MSCI Germany Index(EWG) is down only 1.2%.

To view Gregg Greenberg's video take on ETFs and CEFs, click here.

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