A common misunderstanding is that a closed-end fund (CEF) is a traditional mutual fund or an exchange-traded fund (ETF). A closed-end fund is not a traditional mutual fund that is closed to new investors. And even though CEF shares trade on an exchange, they are not exchange-traded funds (ETFs).
CEFs do share some traits with traditional open-end mutual funds:
- Both have an underlying portfolio of investments with a net asset value
- Both are run by a professional management team
- Both have expense ratios and, typically, fee schedules
- Both may offer distributions of income and capital gains to investors
However, traditional mutual funds issue and redeem shares daily, at the end of business, at the fund's net asset value. CEFs do not issue or redeem shares daily. Instead, CEF shares trade on an exchange intraday, like stocks. The share price for a CEF is set by the market. The share price only rarely, and by sheer coincidence, equals the CEF's net asset value. Also unlike traditional mutual funds, CEFs may issue debt and/or preferred shares to leverage their net assets. That leverage can increase distributions (income) but also increases volatility of the net asset value.
CEFs also share some traits with ETFs:
- Both have an underlying portfolio of investments with a net asset value
- Both trade during the day on exchanges
- CEF and ETF shares can be treated very much like a stock, in that you can set limit orders, short the shares, and buy on margin
- The portfolios may be leveraged
- Both have expense ratios and, typically, fee schedules
- Both may offer distributions of income and capital gains to investors
