What Are Closed-End Funds?

Closed-end funds are baskets of stocks that are grouped according to an investment objective and overseen by a manager.

Unlike open-end funds, which continue to increase their asset base by selling to new shareholders, closed-end funds bring in assets by selling a fixed number of shares through an initial offering. After the initial sale, the closed-end fund's shares trade like stocks on exchanges like the NYSE or the AMEX.

Low demand for a fund can cause closed-end shares to trade at discounts to net asset value. High demand can create premiums to NAV.

Retirement Daily's Robert Powell recently sat down with Jeffrey Levine, CEO and Founder of Blueprint Wealth Alliance and also the Director of Advisor Education at Kitces.com. 

Robert Powell: "One of the main questions I've always had about closed-end funds is this notion of how do I actually, if I'm an advisor, incorporate this structure into a client portfolio? How do I think about it relative to all the other things I might own and measure it relative to all the other things I might own?"

Jeffrey Levine: "So, I think that's the biggest thing, right, is that there's always options out there, and we've got to see what are the unique advantages and the unique disadvantages that come along with closed-end funds, and like everything else, there's no free lunches, but there are some unique advantages that we can get, particularly as professional advisors.

For instance, if we compare closed-end funds to let's say open mutual funds. With the open mutual fund, you generally are having net asset value at the end of the day, so there's not really the same trading of at a discount or at a premium as you can see with a closed-end fund. With a closed-end fund, you often see that a lot more, so you might find investments that within the closed-end fund, for instance, are valued at $10, but the closed-end fund itself is trading on the exchange at $9.

So, there is an inherent value there that may be available. And again, for professional advisors that are better able to analyze that and have those tools or at least very educated investors, then you're typically in a better position to take advantage of those. Now, obviously it comes with risks as well because you could be buying things at a premium, whereas and again, with an open-end mutual fund, you don't see that. So, that's probably the biggest difference between a closed-end fund and a mutual fund that's going to impact most investors.

Want to Buy $1 Worth of Stock for 90 Cents or Less?  Click here to register for a free online video in which TheStreet's retirement expert Robert Powell and an all-star panel. The webinar is sponsored by Nuveen.

 

More from Video

A Guide to Investing in the Fast-Emerging Cannabis Industry

A Guide to Investing in the Fast-Emerging Cannabis Industry

Canadian Pot Legalization Could Be A Fresh Tailwind for Cannabis Stocks

Canadian Pot Legalization Could Be A Fresh Tailwind for Cannabis Stocks

Striking Options: Earnings, Gold, & Nasdaq

Striking Options: Earnings, Gold, & Nasdaq

This Market is Comparable to Getting Into a 'Fist Fight'

This Market is Comparable to Getting Into a 'Fist Fight'

3 Things Investors Can Do to Stay Strategic When the Market's Volatile

3 Things Investors Can Do to Stay Strategic When the Market's Volatile