What Is a Closed-End Fund?

Introduction

Most people are familiar with mutual funds and ETFs. But there is another type of fund that works a little differently. It is called a closed-end fund, and it has some unique features.

What Is a Closed-End Fund?

A closed-end fund raises money by selling a fixed number of shares in an initial public offering. After that, the shares trade on the stock market like a stock. Unlike regular mutual funds, closed-end funds do not create new shares or buy back shares from investors every day.

Trading at a Premium or Discount

Because closed-end fund shares trade on the market, their price can differ from the value of the investments they hold, called net asset value. A fund might trade at a discount, below its holdings' value, or at a premium, above it. Some investors look for funds trading at big discounts.

Pros and Cons

Closed-end funds often focus on income, such as municipal bonds or high-yield bonds, and may pay generous distributions. Many use borrowed money, called leverage, to boost returns, which also increases risk. They can have higher fees than ETFs.

Conclusion

Closed-end funds are a lesser-known corner of investing. Understanding them adds another tool to your investing knowledge!