Closed-End Vs Open-End Funds
Much like an individual’s wardrobe, many portfolios are collections of separate items. They combine stocks and bonds and other investments into the investor’s desired “look.” Open- and closed-end funds offer this kind of variety and opportunity in one product.Mutual funds are open-end funds – there’s no limit to the shares they can issue. When an investor buys shares in a mutual fund, more shares are created. When shares are sold, they’re removed from circulation. If too many are redeemed at the same time, the fund may have to sell some of its investments to pay the investor.Mutual funds do not trade on the open market. Their price is based on the fund’s total value, or net asset value, which is reset at the end of each day based on the amount of shares bought and sold during that time.Closed-end funds are launched through an IPO, and trade in the market like a stock or an ETF. They issue a limited amount of shares. Their value is also based on their NAV, but supply and demand determine the prices at which they trade.Investors should know that many closed-end funds pay nice dividends, and some use leverage to increase gains. But with the chance for big returns comes intense scrutiny, and many closed-end funds end up being downgraded. Downgrades make it more expensive for closed-end funds to borrow money to invest, and higher borrowing costs can ultimately reduce returns.
Fact checked by Yarilet PerezReviewed by Somer AndersonFact checked by Yarilet PerezReviewed by Somer Anderson
Closed-end funds issue only a set number of shares to a limited number of investors. An initial public offering (IPO) is an example of shares issued in a closed-end fund format. Mutual funds and ETFs are considered open-end funds where shares are created as investors buy them.
Key Takeaways
- Closed-end funds issue only a set number of shares, which then are traded on an exchange.
- Mutual funds are open-ended funds where new shares are created whenever an investor buys them.
- Closed-end funds manage money from a pool of investors.
Closed-End Funds
A closed-end fund is launched through an initial public offering (IPO) to raise money for investment. Only a set number of shares are issued, but the shares continue to trade on the secondary market with pricing determined by supply and demand.
Shares may trade at a price above or below their net asset value (NAV), the price at which it was issued. The purpose of closed-end funds is to pay distributions to their investors, which may include earnings, capital gains, and return of principal.
An interval fund is a closed-end fund that periodically offers to repurchase its shares from shareholders.
Open-End Funds
Open-ended funds continuously accept new investors, issue new shares, and grow their assets. Mutual funds and exchange-traded funds (ETFs) are open-ended funds. When investors purchase shares in a mutual fund, more shares are created to accommodate them. Investors may redeem shares daily through the administrator.
Open-end funds are priced only once per day. At the end of each trading day, the funds are repriced based on the number of shares bought and sold. Their price is based on the net asset value of the shares.
How Are Stocks Traded Within an Open-Ended Fund?
The stock shares within these funds do not trade on the open market. Fund shares can only be sold back to the company that issued them.
What Is an Example of a Closed-End Fund?
Closed-end funds or CEFs manage money gathered from a pool of investors. They have a fixed number of shares available for trading and do not offer redemptions. The BlackRock ESG Capital Allocation Term Trust (ECAT) is a CEF.
What Is an Example of an Open-Ended Fund?
The Invesco QQQ is an exchange-traded fund (ETF) that includes the stock shares of Apple, Google, and Microsoft.
The Bottom Line
Closed-end funds have a fixed number of shares available for trading and investors cannot redeem their shares with the fund administrator but must trade them on the secondary market. Open-end funds issue new shares, are frequently rebalanced, and allow investors to redeem shares through the fund administrator.
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