Closed-End Funds FAQ

This text is adopted from a brochure entitled "Understanding the Advantages of Closed-End Funds," which is produced by the Closed-End Fund Association (CEFA), the national trade association representing the closed-end fund industry.

Is a closed-end fund "closed" to new investors?

A common confusion is between closed-end funds (CEFS) and open-end funds that are "closed." CEFs have fixed amounts of capital and shares but are open to new investors through customary securities trading procedures. Conversely, open-end funds that are "closed" do not allow new investors into a fund.

How many stocks might an equity closed-end fund own?

The number can range from a few stocks up to hundreds, depending on the quantity of assets: how much diversification or concentration the manager wishes portfolio holdings to be. Funds which hold 30 or fewer stocks are sometimes called "focus funds," because they seek to generate superior performance from their very best stock selections. While such a strategy can be rewarding for investors at times, it also may involve greater risk than a portfolio which is diversified among hundreds of stocks.

Can a closed-end fund "go broke"?

An investment company is prohibited by law from engaging in active business enterprise, other than of an investment nature. The fund can't go broke because it moves into an unproductive line of business, or if all its markets and customers disappear. Assuming the fund's fiduciaries do their job in safeguarding assets, the only way a closed-end fund can go broke would be for all its portfolio holdings to become worthless.

Can you make money buying closed-end fund shares by purchasing when discounts are "deep" and then selling when discounts narrow?

Perhaps. but short-term trading of these shares can be very risky. For starters, your commissions will reduce any returns you earn. Also, the factors which produce discounts in closed-end fund shares can take time to change. You may find that you bought a fund for the wrong reason -- because it sells at a deep discount -- rather than because it meets your investment objective.

What is an automatic dividend reinvestment plan?

This is a plan through which all income dividends or capital gains distributions issued by the fund, or both, are automatically reinvested in new shares. In some closed-end funds, this is the "default" choice, which goes into effect unless the shareholder specifically notifies the fund that dividends are to be paid in cash.