NEW YORK ( TheStreet ) -- Since the financial crisis, most mutual funds have delivered solid returns. But investors could have done even better with closed-end funds. During the three years ending in 2012, the average intermediate-term bond mutual fund returned 7.0% annually, compared to a return of 11.4% for closed-end peers, according to a Morningstar study. While emerging-markets mutual funds returned 4.3% annually, closed-end returned 6.7%. Most closed-end funds also topped comparable ETFs. The average foreign large value closed-end returned 5.7%, compared to 3.2% for comparable ETFs.Morningstar analyst Mike Taggart says that the peculiar structure of closed-end funds has enabled them to get a big boost from the low interest rates of recent years. Like mutual funds, closed-end funds hold portfolios of stocks or bonds. But closed-end funds issue a limited number of shares that trade on stock exchanges. In contrast, traditional mutual funds can sell an unlimited number of shares.
Make no mistake, leverage can be risky. Just as it can magnify gains in a bull market, leverage can exaggerate losses in a downturn. If interest rates spike, then closed-end bond funds could crater. Even in flat markets, leverage can make funds volatile.