Glossary
Closed-end fund
A fund with a fixed number of shares that trade on an exchange, often at a premium or discount to the value of its holdings.
On this page
A closed-end fund (CEF) is a pooled investment that raises money once, in an initial offering, and then has its shares trade on a stock exchange like any company's stock. Unlike an ordinary mutual fund, it does not issue new shares or redeem existing ones every day. Because supply is fixed, the market price can drift well away from the value of the fund's holdings, which creates both opportunities and pitfalls for investors.
How it works
The fund's net asset value (NAV) per share is the market value of its portfolio minus liabilities, divided by shares outstanding. Its share price is set by buyers and sellers on the exchange.
Features to understand
- Leverage. Many CEFs borrow, often 20% to 35% of assets, to boost income, which magnifies both gains and losses.
- Distributions. High payout rates are common. Part of a distribution can be a return of capital, which is not the same as income earned.
- Fees. Expense ratios, including interest on leverage, are often well above those of index funds.
- Liquidity. Some CEFs trade thinly, with wide spreads.
Discounts can persist for years, so buying at a discount does not guarantee it will narrow. CEFs differ from ETFs, whose creation and redemption mechanism normally keeps the price close to NAV.