Author Topic: I have seen a lot of news about Closed End Funds lately  (Read 2095 times)

frodster1979

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I have seen a lot of news about Closed End Funds lately
« on: June 06, 2016, 07:09:14 AM »
Hello -
I have seen many news on the financial media about the convenience of the Closed End Funds lately and I am not familiar with this investment vehicle.
Any experience with CEFs you can share? I understand these are actively managed funds that are usually used for income and have relatively high management fees.
When would it be smart to have a CEFs in your portfolio Vs. open funds like Vanguard?

Appreciate your insights!


protostache

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Re: I have seen a lot of news about Closed End Funds lately
« Reply #1 on: June 06, 2016, 07:18:28 AM »
"Closed end fund" is just an old term for an ETF. It's the same basic deal, except most ETFs are linked to an index while CEFs are typically actively managed and ETFs have interesting options for creating more shares.

FarmerPete

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Re: I have seen a lot of news about Closed End Funds lately
« Reply #2 on: June 06, 2016, 08:12:09 AM »
"Closed end fund" is just an old term for an ETF. It's the same basic deal, except most ETFs are linked to an index while CEFs are typically actively managed and ETFs have interesting options for creating more shares.

My understanding was that a CEF couldn't create more shares apart from dividend reinvestments.  I used to hold one (PDT).  It was a good earner for me while I held it.  Dividends paid out monthly.  Currently producing 6.66% yield.  Was around 8-10% over the time I held it.  This one primarily invested in preferred stocks for utilities.  The main thing I would warn you about is to check the average volume.  PDT has a current average of 154k shares a day.  That is not horrible, but it is pretty low.  Compare that to the volume of a popular index fund, which could easily be in the multi-millions.  The lower the volume, the lower the liquidity.

protostache

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Re: I have seen a lot of news about Closed End Funds lately
« Reply #3 on: June 06, 2016, 08:20:22 AM »
"Closed end fund" is just an old term for an ETF. It's the same basic deal, except most ETFs are linked to an index while CEFs are typically actively managed and ETFs have interesting options for creating more shares.

My understanding was that a CEF couldn't create more shares apart from dividend reinvestments.  I used to hold one (PDT).  It was a good earner for me while I held it.  Dividends paid out monthly.  Currently producing 6.66% yield.  Was around 8-10% over the time I held it.  This one primarily invested in preferred stocks for utilities.  The main thing I would warn you about is to check the average volume.  PDT has a current average of 154k shares a day.  That is not horrible, but it is pretty low.  Compare that to the volume of a popular index fund, which could easily be in the multi-millions.  The lower the volume, the lower the liquidity.

Right. The "closed end" part means they're created with a fixed amount of money, which means they can't create more shares. An authorized participant in an ETF, on the other hand, can create more shares by gathering together the assets needed for one or more "creation units" and redeeming them with the ETF sponsor, then selling the shares to market participants.

In either case you, the market participant, are buying a portfolio of stocks, bonds, and other assets. Fundamentally it's no different than buying an actively or passively managed mutual fund.

Tyler

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Re: I have seen a lot of news about Closed End Funds lately
« Reply #4 on: June 06, 2016, 09:42:31 AM »
The thing about CEFs is that because the fund can't create more shares, the price of the shares may diverge from the index and trade at a discount or a premium. So they don't necessarily act just like ETFs.

Also, IIRC they may sometimes have different tax rules. There are a few gold bullion CEFs that are popular because, with the right tax paperwork, the gold is taxed like an investment and not a collectible.

Financial.Velociraptor

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Re: I have seen a lot of news about Closed End Funds lately
« Reply #5 on: June 06, 2016, 03:10:50 PM »
I'm in four CEF municipal bond funds.  I chose CEF because since there is no share creation/liquidation the fund can hold bonds to maturity and not be forced to sell at the worst time.  Most CEFs use about 30-45% leverage as well.  For me, this means tax free municipal income at a 6+% yield instead of 4-something.  See IIM, IQI, NEA, NIO.

It is important to check the NAV of the fund and not buy when it is selling at a premium.  You can often find 15% or greater discounts in the CEF space.  It's a great way to 'buy low'.

retiringearly

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Re: I have seen a lot of news about Closed End Funds lately
« Reply #6 on: June 06, 2016, 03:39:03 PM »
I'm in four CEF municipal bond funds.  I chose CEF because since there is no share creation/liquidation the fund can hold bonds to maturity and not be forced to sell at the worst time.  Most CEFs use about 30-45% leverage as well.  For me, this means tax free municipal income at a 6+% yield instead of 4-something.  See IIM, IQI, NEA, NIO.

It is important to check the NAV of the fund and not buy when it is selling at a premium.  You can often find 15% or greater discounts in the CEF space.  It's a great way to 'buy low'.

I have similare experience with muni bond CEF's.  I don't own any now, but I was able to buy them up to a 22% discount to net asset value.  (The 22% discount was during the heat of the financial meltdown).  You can buy closed end muni funds at a 10% discount to NAV at least a couple times each year.