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."
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