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ETFs vs. Closed-End Funds for Retirement

Stocks in this article: PCEF CAF BTO MTP FFD

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BOSTON ( TheStreet) -- For decades, investment strategy typically fell into two camps: passive or actively managed funds. The pros and cons of each will probably always be debated.

In the past 20 years, the instruments that embodied these approaches have been Exchange Traded Funds and traditional mutual funds. Investors looking to build a portfolio, IRA or 401(k) asset allocation, however, are finding that products frequently blur those traditional lines. In addition to innovations within the burgeoning, evolving ETF space, closed-end funds, first developed more than a century ago in the 1890s, are also once again primed for consideration.

There is no denying the impact ETFs have had on investors since they were introduced two decades ago. Last year ended with 938 such funds in existence, an increase of 134 over the previous year, a 14% hike accounting for $785 billion in assets. In January of this year, assets surpassed the $1 trillion mark.

What were once relatively straightforward "baskets" of securities tied together thematically (small-cap, energy, precious metals, S&P 500, etc.) have become more complex as they became more popular. No longer limited to passive strategies, there are even actively managed varieties and ETFs that approximate hedge fund and endowment strategies.

Among the primary advantages touted for ETFs is that they typically have lower costs and greater transparency compared with mutual funds. Unlike their asset share rival, they trade throughout the day.

ETFs may be the new, popular kid on the block, but closed-end funds -- which superficially resemble them -- may be worthy of equal consideration.

Despite being far older a concept than ETFs, CEFs command a much smaller market share. According to the Investment Company Institute, combined assets were $227 billion at the end of June. There were 624 closed-end funds at the end of the second quarter; 420 bond funds and 204 equity funds.

Popular CEFs, according to the Closed-End Fund Association, include the Morgan Stanley China A Share Fund (CAF) (with a one-year Lipper average of 26.05%), the John Hancock Bank & Thrift Opportunity Fund (BTO) (a 21.25% one-year Lipper average), MLP & Strategic Equity Fund (MTP) (with a 21.25% Lipper average) and the Morgan Stanley Frontier Emerging Markets Fund (FFD) (with a 24.19% one-year Lipper average).

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