Entity Types

Closed End Fund


Closed End Funds are mutual funds that have a fixed number of shares and trade on the New York Stock Exchange

Key Characteristics of Closed Ends Funds
  • Are a type of mutual fund
  • Trade on the NYSE
  • Have a fixed number of shares
    • Shares are not created or redeemed after the fund is created
    • Means that shares can trade at a premium or discount to nav
    • Funds hold an IPO to issue the initial shares
  • Shares are not created or destroyed to meet investor demand - they can only be traded between investors
  • Often will employ leverage (invest long-term and borrow short term)
  • Often are setup for yield and dividend purposes (not capital gains)
  • Can be confused with but are different than ETFs

Benefits of Closed End Funds
  1. Collect dividend payments (boosted by leverage)
  2. Capture capital gains if the underlying assets appreciate
  3. Benefit from a shrinking discount to NAV (if you purchase at a discount)

Premiums and Discounts to NAV
  • Trade at a premiums or discounts to NAV (depending on investor demand)
    • Sometimes the premium or discount can be >10% of Nav.¬† This creates significant buying or selling opportunities
    • The leverage employed amplifies price swings
  • Became popular and sold at premiums in the 2010s when interest rates were stuck around zero and investors sought yield
  • Prices tend to fall and trade at discounts when rates are increasing
  • CEFs can be prone to trading at discounts¬†
    • CEFs are often small & thinly traded - which can lead to price swings
    • CEFs are primarily traded by retail investors (often unsophisticated) who may sell based on fear or without realizing they are selling at a discount
    • can be a good time add to them - buying at a discount is a great opporunity

Optimal Conditions for Closed End Fund Performance

Municipal Bond Fund Closed End Funds

  • Started to trade at large 10-15% discounts as rates rose in 2017 and 2018
  • Investors shied away from rising rates
    • Rising rates lower asset values of bonds held in the fund
    • Rising rates increase interest expense on fund leverage