Learning Center

Back

Income Investors May Find Closed-End Funds on Sale

Most mutual funds are open ended, which means the investment company can issue and redeem fund shares to meet investor demand. By contrast, closed-end funds issue a fixed number of shares in an initial public offering (IPO), and thereafter shares are traded on an exchange.

Both open-end and closed-end funds may hold stocks, bonds, and other types of underlying investments. Unlike open-end funds, closed-end funds do not have to maintain cash reserves or sell securities to meet redemptions, so fund managers can invest in less-liquid securities. They can also use riskier leverage strategies, which can magnify a fund’s positive or negative returns and make them more volatile.

Closed-end funds are often designed to generate a steady income stream — called the distribution rate — that tends to be higher than what might be offered by an open-end fund with similar securities. However, closed-end funds may be better suited for long-term investors who can tolerate the associated price swings.

Closed-end funds are much less common than open-ended funds and tend to be owned by more affluent investors. Median household assets (excluding primary residence): all U.S. households $80K, open-end fund owners $250K, individual equities owners $350K, closed-end fund owners $450K.

View Discounts in Perspective

The market price of closed-end fund shares trading on a secondary market is determined by supply and demand. The trading price fluctuates with market conditions and can be higher or lower than the net asset value (NAV) of the shares. Shares, when sold, may be worth more or less than their original cost.

If the current price is higher than the NAV, shares are selling at a premium. If the price is lower, they are selling at a discount. A wide discount does not necessarily make a fund a better value. However, buying shares at a wider-than-normal discount may provide a bonus if the gap between the share price and the NAV narrows after investment.

When making investment decisions, it’s important to understand the reasons for the fund’s current valuation, compare the discount to the historical average, and assess the likelihood that the fund may meet its objectives, including any potential income stream.

Distributions from closed-end funds can come from three possible sources: income distributions, including payments from interest and dividends; realized capital gains; and return of capital. Distribution rates are not guaranteed and can increase or decrease in response to market conditions.

Closed-end funds incur broker trading fees and charge management fees. They are generally not redeemable; the investment company does not have to buy back shares to fulfill investor demand.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.


Information provided has been prepared from Broadridge Advisor Solutions sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. Broadridge Advisor Solutions is not an affiliate of Equitable Advisors, LLC. Please consult your tax and legal advisors regarding your particular circumstances. Neither Equitable Advisors nor any of the data provided by Equitable Advisors or its content providers, such as Broadridge Advisor Solutions, shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the Equitable Advisors website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.

Securities offered through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products offered through Equitable Network, LLC and its subsidiaries.

California Insurance License #: 0H51961

Securities offered through Equitable Advisors, LLC (NY,NY 212-314-4600), member FINRA/SIPC (Equitable Financial Advisors in MI & TN). Investment advisory products and services offered through Equitable Advisors, LLC, an SEC registered investment advisor.

Annuity and insurance products offered through Equitable Network, LLC, which conducts business in CA as Equitable Network Insurance Agency of California, LLC, in UT as Equitable Network Insurance Agency of Utah, LLC, and in PR as Equitable Network of Puerto Rico, Inc. Equitable Advisors and its affiliates do not provide tax or legal advice. Please consult your tax and legal advisors regarding your particular circumstances. Individuals may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed. The information in this web site is not investment or securities advice and does not constitute an offer.

For more information about Equitable Advisors, LLC you may visit equitable.com/crs to review the firm’s Relationship Summary for Retail Investors and General Conflicts of Interest Disclosure. Equitable Advisors and Equitable Network are brand names for Equitable Advisors, LLC and Equitable Network, LLC, respectively.

Link to equitable.com

Privacy Policy

Check the background of this financial professional on FINRA's BrokerCheck
Check the background of this financial professional on FINRA's BrokerCheck