Closed-End Fund Is Reopening as an ETF
ETFs also tend to have much lower costs than open-end funds. The new First Trust will have an expense ratio of 0.7%, compared with 0.93% for its predecessor fund. It's also possible to list options on ETFs, and they are generally more tax-efficient than closed-end funds.
But while other closed-end funds may opt to reorganize as ETFs, it's unlikely that it will happen on a large scale, if only because the majority of closed-end funds are actively managed. So reorganizing as an ETF could require changing the investment strategy.
Closed-end funds that reorganize as ETFs also lose the ability to use leverage, or borrowed money, to juice their returns. Alex Reiss, senior closed-end fund analyst at Ryan Beck & Co., says that roughly 75% of closed-end funds are leveraged.
"I think it's going to be a fairly limited event," he says of reorganizations into ETFs. "There is a chance that you'll see one here or one there. But certainly for the purposes of investing, trying to pick which fund is likely to become an ETF and the timing of that policy change is almost impossible to get right."Reiss adds that the reorganization works well for First Trust because the firm has an existing fleet of both closed-end funds and ETFs. "As a firm, they're in a position to do it because they have both sides of the business."
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV