Gut Check

Herzfeld admits that this particular opinion is based more on his "gut feeling" rather than quantitative analysis. That's understandable; it's hard, if not downright impossible, to measure the extent to which investment advisers are steering clients away from closed-end funds and into ETFs. Unlike ETFs and open-end mutual funds, where new shares can be created or redeemed depending on demand, the closed-end funds' supply remains fixed. Therefore, closed-end supply will only increase through new issues, not demand.

Those mechanics can get overlooked amid the current ETF craze, potentially leading investors to believe that ETFs are growing at the expense of CEFs. ETFs have grown from less than $1 billion in 1993 to more than $260 billion at the end of September, just under the total $269 billion for CEFs, according to the Investment Company Institute. This growth has set off a flurry of articles questioning whether ETFs will ultimately replace open-end mutual funds and CEFs entirely.

Lipper CEF specialist Don Cassidy says Herzfeld's intuition has merit in relation to a small section of the market like REITs and utilities, where active management is less a priority for investors and expense ratios for ETFs can be substantially cheaper than a comparable CEF. The average expense ratio for the 23 available real estate CEFs is 1.2%, compared with an average cost of 0.4% for the four publicly traded real estate ETFs, according to Morningstar.

However, Cassidy dismisses the broader idea of a zero-sum fund landscape.

"ETFs may be stealing CEF business in a few isolated cases like REITs and energy, but it's important to remember that only a tiny percentage of advisers ever have used CEFs to begin with, so it is not like there is a massive potential for a shift in dollars there."

No Contest

Cassidy gives Herzfeld's hunch some credence, but other CEF analysts are more dismissive of the idea that ETFs are encroaching on CEF territory. In fact, many don't see them as competitors at all.

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