Portfolio Management – The asset base for Closed-End funds is relatively stable. Without the pressure of constantly investing or redeeming securities based on investor demands, Closed-End funds may be able to take better advantage of longer-term and less liquid securities or markets.
Distributions – Closed-End funds are generally designed for regular cash flow. Distributions are paid according to a prescribed schedule — typically monthly or quarterly — which allows investors to plan the timing of this income. Of course, the actual amount of the distributions vary with fund performance and market conditions.
Leverage – Closed-End funds often borrow capital or issue preferred shares in order to leverage their portfolios. As long as the short-term interest rates paid to the lenders or preferred shareholders are lower than the net long-term rates earned by the underlying fund’s portfolio, the fund’s common shareholders will earn higher rates than they would have without leverage. If the short-term rates paid for leverage approach the return earned by the fund’s portfolio, the beneficial effects of leverage will be reduced and the amount available to common shareholders will decline. At the same time, the fund’s net asset value per common share will be more volatile than that of comparable unleveraged funds since the increases or decreases in the total portfolio value are all attributed to the common shares.
Market Pricing – Investors who wish to buy or sell fund shares do not purchase or redeem directly from the fund – rather, they buy or sell fund shares on the stock exchange in a process identical to the purchase or sale of any other listed stock. All the strategies associated with stocks, such as market orders, limit orders, stop orders, short sales, and margin buying can be used in the purchase and sale of Closed-End funds.
Trading Liquidity and Flexibility – A stock market listing means that Closed-End fund shares may be bought or sold at any time during the trading day, and the price is updated throughout the trading day, not just at the close. Like other investments, share prices will fluctuate with the market and may be worth more or less at the time of sale than the original purchase price.
Expenses – Due to the low marketing expenses (recall that Closed-End funds have fixed shares and assets, so there is minimal need for marketing and distribution costs) and typically lower turnover, Closed-End funds tend to have relatively low operating costs. However, investors must still pay a brokerage commission to purchase and sell shares for all Closed-End funds. For those investors who trade frequently, this can significantly increase the cost of investing in Closed-End funds. This means Closed-End funds may have lower expenses internally, but an investor’s total costs may not be lower.
Trading Fees – Because Closed-End funds are purchased and sold just like regular stocks, only brokerage fees are paid to purchase or sell shares. Closed-End funds typically do not impose annual 12b-1 fees.
Minimums – Because Closed-End funds trade on secondary markets like other stock, after the IPO there is no minimum purchase or sale requirement. Investors may purchase or sell as little as one share of a Closed-End fund.
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