Closed End Funds

According to Forbes,

A closed end fund is a managed portfolio of investments run by an investment manager looking to find attractive assets for the portfolio, so very similar to many mutual funds. What’s unique about closed-end funds is that they only issue a fixed number of shares. Other funds, such as mutual funds and ETFs, will typically permit new shares to be created or redeemed freely, which can help bring the value of the fund back to the value of its assets. This means that if the fund is at a premium, more shares can be created, or if at a discount shares can be bought back. Closed end funds don’t have this option. The number of shares is fixed. They also trade on stock exchanges so the value of the fund can freely trade above the value of its assets, called trading at a premium, or below the value of its assets, called trading at a discount.

Closed end funds (CEFs) are an interesting type of investment. They are leveraged, actively managed, available at premiums or discounts, and often invest in somewhat esoteric portfolios. For these reasons, they can be a little riskier and more challenging to understand than exchange-traded funds (ETFs).

When considering a CEF, one should research the net asset value (NAV), wether it is priced above or below the NAV, and whether it has been priced above or below the NAV historically. One should also look at the expense ratio, which is often much higher for CEFs than ETFs. Finally, the portfolio and the risk level of the underlying securities are essential to understand. Many CEFs chase high yields by investing in junk bonds, preferred stocks, master limited partnerships (MLPs), and real estate investment trusts (REITs). These each come with their own risks and benefits.

CEF Watchlist

Global Stocks & Bonds

Municipal Bonds (Tax-Exempt)

  • Blackrock MuniYield Quality Fund III (MYI)
  • Nuveen AMT-Free Quality Muni (NEA)

Preferred Stocks