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The ABCs of CEFs: What You Need to Know About Closed-end Funds
Closed-end funds (CEFs) are launched with a fixed number of shares to raise an initial lump of capital, then close once all the shares are sold.1 Hence, “closed-end fund.” Their main alternatives are open-end funds like exchange-traded funds (ETFs), which share some similarities but differ in several significant ways.
Where ETFs are traded on the stock exchange and accept a constant flow of new capital, CEFs are traded on the stock exchange but don’t issue new shares or buy stocks back. Where ETF share prices are set at the end of the trading day and are closely tied to its net asset value (NAV), CEF share prices fluctuate throughout the day and can vary away from its NAV due to supply and demand.
Unlike most ETFs, the main reason for investing in a CEF is for the income because they are designed to make regular distributions to shareholders. Traditional CEFs distributed $16.3 billion to shareholders in 2023.2 CEFs were also historically good options for portfolio diversification, professional management, transparent pricing, and potentially high yield.
CEFs can and historically have had moments of trading at a premium, meaning they sell for more than the NAV, but most have been heavily discounted in recent years, meaning they sell for less than the NAV.1 At the end of 2023, there were 402 traditional CEFs with $249 billion in assets.2 Yet the number of CEFs has been in decline for several years.2
Like mutual funds more broadly, more and more CEFs are being converted to ETFs. In fact, more CEFs have been liquidated, merged, or converted to ETFs in recent years than have been created.2 When converted to an ETF, CEF share price becomes more closely aligned with the NAV, eliminating the discount and giving a boost to shareholders. ETFs are also more tax efficient and more liquid with lower expense ratios and better transparency, with holdings disclosed daily instead of quarterly.
The RiverNorth Active Income ETF (CEFZ) is a converted mutual fund containing a mixture of CEFs and other investment vehicles like ETFs, cash, and stocks. But make no mistake, this ETF is still income-focused. The fund has a long history of being managed by one of the largest institutional investors in CEFs.
- https://www.investopedia.com/terms/c/closed-endinvestment.asp
- https://www.ici.org/system/files/2024-06/24-factbook-ch5.pdf
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An investment in TrueShares is subject to numerous risks, including possible loss of principal. The ETFs are subject to the following principal risks: Authorized Participants, Market Makers, and Liquidity Providers Concentration Risk associated with ETFs; Equity Market Risk; Management Risk; Market Capitalization Risk (Large Cap; Mid Cap, Small Cap Stock); Market Risk; New Fund Risk: The Fund is a recently organized, non-diversified management investment company with no operating history. As a result, prospective investors have no track record or history on which to base their investment decision. Additionally, the Adviser has not previously managed a registered fund, which may increase the risks of investing in the Fund.
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