Definition and Examples of Closed-End Funds
A closed-end fund is a type of investment company that pools investor contributions together to buy a mix of securities, such as stocks and bonds. The fund’s managers will make investment decisions in accordance with the stated investment objectives of the fund. Like mutual funds, closed-end funds can have a variety of objectives. BlackRock’s Core Bond Trust (BHK) is a closed-end fund that seeks to “provide current income with the potential for capital appreciation.” PIMCO’s Municipal Income Fund (PMF) seeks current income that is exempt from federal income tax.
Acronym: CEF
How Closed-End Funds Work
Unlike the more popular mutual fund, closed-end funds don’t normally buy back shares from investors who want to sell. Closed-end funds sell their shares to investors in an initial public offering (IPO). Investors who want to sell their shares then do so on the open market, similar to the way a stock is traded.
Types of Closed-End Funds
There are many different types of closed-end funds, defined by their investment style or objective. There are closed-end funds that primarily invest in municipal bonds in order to generate tax-free income for investors. Closed-end funds may also focus on taxable, fixed-income investments like corporate bonds, or in specific equity classes such as domestic, foreign, or even specific sectors. The Cohen & Steers Quality Income Realty Fund (RQI) focuses on real estate securities, with an investment objective of current income and capital appreciation.
Alternatives to Closed-End Funds
Mutual funds and ETFs are similar to closed-end funds. They offer many of the same features. You might want to consider mutual funds and ETFs as well if you’re thinking about investing in a closed-end fund, Mutual funds and ETFs are open-end funds that offer the same diversification advantages as closed-end funds in that the fund will invest in a broad number of securities. This is usually more than what you could do on your own as an individual investor, especially if you’re just starting out and don’t have a lot of money to invest all at once. ETFs and mutual funds may also have lower expense ratios than closed-end funds. This can make them more affordable to new investors. The Cohen & Steers Quality Income Realty Fund (RQI) has a managed assets expense ratio of 1.63%, while the Vanguard Real Estate ETF (VNQ) has an expense ratio of 0.12%.
Closed-End Funds vs. ETFs
How to Invest in Closed-End Funds
Closed-end funds can be purchased through most brokerage firms, both traditional and online. A professional investment advisor can also help you decide whether you should invest in closed-end funds if you work with someone. They can pick some that are a good fit for you and your portfolio. Browse the available closed-end funds at your brokerage firm if you manage your own investments. You may have access to a screener that could help you sort the options and narrow down your selection.
