This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Closed End Fund Puzzle: One Manâ's Loss Is Another Manâ's Gain

Stocks in this article: ADX BIF BTF DNY EQS ETY GDL SWZ TTF TY

Closed-end funds are business entities that invest in securities and financial instruments as a way of making profits and losses. Unlike other funds, closed-end funds have their number of shares fixed and as a result their share price is determined directly by the interests of buyers and sellers in the market. The famous closed-end fund puzzle kicks in because these funds often trade at a discount to their net asset value months after they are offered and traded on public exchanges.

One of the explanations for this discount is investor sentiment. Most U.S. shareholders of closed-end funds are retail investors that sometimes are not as rational as the market would like it to be. As a result, closed-end fund prices unfortunately trade away from the net asset value of their underlying holdings. Furthermore, the persistency of the closed-end fund discount can also be attributed to the enormous cost of arbitrage.  For the efficient market to work, arbitragers need to be able to replicate the fund’s portfolio and go long or short on the fund. Because some of the underlying instruments in funds are so illiquid, transaction costs for arbitragers can often be very high. It can thus often be impossible for institutional arbitragers to narrow the discount to net asset value in any given period.

As of last Friday’s market close, there are 476 listed closed-end funds on the American stock exchanges. Out of all the American-listed funds, 48 percent of them traded at a discount to net asset value of more than two percent while only 27 percent of them traded at a premium to net asset value of more than two percent. Should we believe in the efficiency of the market, then share prices of such funds should closely track the fund’s net asset value.

One man’s misfortune is sometimes another man’s gain. To take advantage of this discount to underlying assets, we have screened a list of top ten discounted funds that can be traded on the Kapitall platform:

1 of 4

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

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.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs