They're similar but when you get under the hood with these
products, they're very different and that can affect the outcome
of your investment. Here are the basics of each.
Open End Funds
You know open end funds as mutual funds. As more investors
enter the fund, it creates more shares. When a current investor
sells all or a portion of the shares, they're removed from
circulation. This creates a constant cycle of issuance and
buybacks. If a large investor sells, the fund's manager may have
to liquidate some of the fund's positions to pay the
If the total value of a mutual fund is so high that the
management team can no longer meet the fund's stated objective,
they may close the fund to new investors or in extreme cases, not
allow current investors to purchase additional shares.
Open end funds do not trade on the open market. You can't
watch the price fluctuate on an exchange as you can with an ETF
or equity. At the end of each trading day, the fund is repriced
based on the number of shares bought and sold. Pricing is based
on the net asset value-the total value of the fund.
If you have a 401(k) or other company sponsored retirement
vehicle, you likely already have exposure to open end funds.
Closed End Funds
A closed end fund functions like an ETF. In fact, it's not
difficult to find articles that provide ETF recommendations that
contain closed end funds even though they are different. Closed
end funds are often actively managed while
track an index. CEFs may trade at a discount or premium to their
net asset value. ETFs generally do not. Finally, the fees
associated with CEFs are often higher than ETFs.
How do closed-end funds compare with open-end funds? Closed
end funds launch through an IPO just like a publically traded
company. Only a set number of shares enter the market with supply
and demand determining the price. This is how CEFs are able to
trade at a discount or premium to their NAV.
CEFs trade on an exchange just like a stock or ETF. If you own
shares of a mutual fund, you can thank ETFs and to a lesser
extent, CEFs for bringing the expenses of your mutual funds down.
These cheaper products have taken market share from mutual funds
causing open end fund managers to lower the expense ratio of the
fund in order to compete.
With more than 650 CEFs on the market, there are plenty of
options. One of the most popular among investors is BlackRock
Corporate High Yield Fund VI (NYSE:
). It has a current yield of 8.2 percent and currently trades at
a 2 percent discount to NAV.
Invest in CEFs with caution. Nearly 70 percent of these funds
are leveraged. Any investment product that relies on leverage to
produce income exposes itself to potential liquidity issues as
well as higher fees.
In 2012, Moody's downgraded the rating of some of the banks
that issue these funds. This could make it more expensive for the
funds to borrow money, causing the fund's expenses to rise. Don't
just evaluate the fund. Also, research the bank that issues
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
Profit with More New & Research
. Gain access to a streaming platform with all the information
you need to invest better today.
Click here to start your 14 Day Trial of Benzinga