CEF shares and the proceeds are invested according to the fund’s investment objectives. “Closed” refers to the fact that, once the capital is raised, there are typically no more shares available from the fund sponsor and the issuance of new shares is closed to investors.
After the IPO, most closed-end funds are listed on a national exchange where the fund’s shares are purchased and sold in transactions with other investors, not with the sponsor company itself. Investors wishing to purchase or sell shares of a closed-end fund simply post their bids or offers via an exchange such as the New York Stock Exchange (NYSE) or the NASDAQ, just like a stock or an ETF.
But unlike a stock or an index ETF, the typical closed-end fund represents a strategy with an actively managed selection of holdings. These investments in securities collectively add up to a value, known as its Net Asset Value (NAV). NAV may be different from the fund’s market price. Market price for the CEF is determined by supply and demand for the CEF, not the sum of the values of the CEF’s components (NAV).
Although the outstanding shares of a closed-end fund remain relatively constant, additional shares can be created through secondary offerings, rights offerings or the issuance of shares for dividend reinvestment.
Written By Kevin Grewal From ETF Tutor Disclosure: No Positions
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfoliosdealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton. He is a contributing author on The Street – his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville.