Closed End Fund

• 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)
  • The fixed share count of the funds enables this - there is no risk of investors withdrawing funds
  • Typically leverage ratios are .6 to .7 times equity
  • Use both debt and preferred shares to gain leverage
• Often are setup for yield and dividend purposes (not capital gains)
• Can be confused with but are different than ETFs

• They offer a liquid way to access illiquid sectors (bonds, preferred stocks, bank loans, etc)
• Owning these in mutual funds or ETFs could be risky if investors panic and sell at a loss
• Offer access to cheap leverage (big funds get better interest rates)
• Offer tax advantages
• When trading at a discount, they offer a unique value
• Offer way to turn boring investments into large gains
• Earn the normal yield the underlying assets pay
• Get price appreciation in underlying assets
• Get price appreciation when discount to Nav shrinks
• 3 Ways to Make Money

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)

• 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

• Moderate Economic Growth
• Low Inflation
• Low 10 Year Treasury Yield (< 3%)

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