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Editor's Note: As part of Mutual Fund Monday, Gregg Greenberg also interviewed Richard Shaker of Shaker Financial Services, whose specialty is trading closed-end funds. to read that interview, please click here .

Just because something looks and trades like an ETF doesn't necessarily make it so.

Investors often confuse exchange-traded funds, or ETFs, and closed-end funds, or CEFs, especially when it comes to investing in a single country. Nevertheless, there are significant differences between the two, and experts recommend reading the fine print before jumping into a particular fund.

"Investors need to do the same degree of comparison shopping they would normally do when choosing between funds, which means digging into things like expense ratios, historical performance and holdings," says Lipper closed-end fund specialist Michael Porter.

Closed-end fund shares are listed on securities exchanges, are actively managed and trade intraday on the open market. They typically trade in relation to, but independent of, their underlying net asset values, or NAVs. That means that unlike open-end mutual funds, shares of closed-end funds can trade at premiums or discounts to their underlying NAVs, a feature that many investors find attractive.

"For long-term holders buying a fund at a discount, all distributions are more valuable than they would be if purchased for a full dollar on the dollar," says Richard Shaker, closed-end fund specialist at Shaker Financial. "For short-term traders, being able to buy when discounts are deeper and sell when they are less is also an advantage."

Conversely, traders can also short CEF shares they believe are trading at too great a premium. Premiums and discounts arise in closed-end funds due to swings in sentiment, shifts in perception of the fund's manager, historical performance and, of course, good old supply and demand.

For example,

The Brazil Fund's


average discount to net asset value has been 16% over the past five years. Substantial price appreciation, however, has cut that discount practically in half. The fund is currently trading at $39.30, just an 8.5% discount.

Some closed-end funds, such as

The Mexico Fund


, have tried to narrow their discounts by offering redemption in kind during limited periods. So far, The Mexico Fund's success remains to be seen as the discount remains at its five-year average of just over 12%.

In the other corner, ETFs also represent a basket of stocks and trade freely on an exchange, but they typically track an index and are not actively managed. And unlike closed-end shares, where the premiums and discounts can be steep, market specialists and institutions tend to keep ETF shares as close to the NAVs as possible.

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iShares MSCI Brazil Index


ETF, which also tracks stocks traded in Brazi, had a recent market price of $26.67, offering only a slight 0.34% discount to its $26.76 NAV.

A quick statistical match-up seemingly favors the Brazil ETF over its closed-end cousin. Both funds hold roughly the same number of stocks, but the ETF has returned 19.92% year to date vs. 14.34% for The Brazil Fund. Furthermore, the Brazil ETF also sports an expense ratio of 0.96% compared with 1.56%.

Upon closer inspection, however, the reasons become evident as to why the ETF has shot ahead in 2005 and, despite being less expensive, why it may not be the better of the two choices.

The ETF not only has 12.92% of its assets in preferred shares of oil giant


( PBRa), but an additional 10.5% of its portfolio in



American depositary shares. That's a pretty good double-down when sky-rocketing oil prices lift the price of both share classes over 50% for the year.

The CEF, on the other hand, owns only the preferred shares for a total of 11.02% of its portfolio. Should oil prices fall and Petrobras take a hit, the CEF should hold up better than the ETF.

Aside from being the better-diversified fund, the Brazil CEF also substantially outperforms the ETF when judged over a longer period. Over the past five years, the CEF has returned an average of 20.21% annually, over 11 percentage points higher than the ETF.

Don Cassidy, fund strategist at Lipper, says investors need to take long-term performance, leverage and manager tenure into account when judging a closed-end fund, just as they would when reviewing an open-end mutual fund. (In the case of The Brazil Fund, its manager, Paul Rogers, has been in the position since 1996.)

But he advises short-term investors stick with unmanaged index funds, like ETFs, since the costs are lower. He adds that ETFs also tend to be more tax efficient and do not distribute capital gains to the same extent as actively managed funds.

Porter says he would also defer to a country ETF "in the case of concentrated portfolios which hold the same assets in essentially the same proportions as the CEF." In such cases, Porter says arbitrage opportunities are often created where a trader can sell short the CEF if it sells at a high premium and buy the corresponding ETF to lock in the difference in premiums.

Not all countries have the luxury of both an ETF and a CEF. It's an honor reserved mostly for developed countries with fairly broad and liquid stock exchanges. The institutional buying associated with ETFs to eliminate premiums and discounts would disrupt trading on narrower, less developed exchanges. As a result, smaller countries like Ireland and India are represented by CEFs like

The New Ireland Fund



The India Fund


, but do not have corresponding ETFs, at least just yet.

For those countries that sport both types of funds, many of the listed closed-end country funds are holding up quite nicely compared to the comparable ETFs.

The Korea Fund


has returned 22.5% annually over the past five years, while the

iShares MSCI South Korea Index


ETF is up 13.28% per year.

The Spain Fund

( SNF) has averaged 11.88% a year since 2000 vs. 8.44% for the

iShares MSCI Spain Index



That said, not all closed-end country funds have been hitting home runs over the past five years.

The Germany Fund


is down 5.8% annually, while the

iShares MSCI Germany Index


is down only 1.2%.

To view Gregg Greenberg's video take on ETFs and CEFs, click here.