Closed-End Funds and Exchange-Traded Funds

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Closed-End Funds and Exchange-Traded Funds

Closed-end funds (CEFs) share some traits with exchange-traded funds (ETFs):

• Both have an underlying portfolio of investments with a net asset value.
• Both trade during the day on exchanges.
• CEF and ETF shares can be treated very much like a stock in that you can set limit orders, short the shares, and buy on margin.
• The portfolios may be leveraged.
• Both have expense ratios and, typically, fee schedules.
• Both may offer distributions of income and capital gains to investors.

Here is how they differ

ETFs have a redemption/creation feature, which typically ensures the share price doesn't stray significantly from the net asset value. As a result, an ETF's capital structure is not closed. CEFs do not have such a feature.

CEFs are actively managed, whereas most ETFs are designed to track an index's performance.

CEFs achieve leverage through issuance of debt and preferred shares, as well as through financial engineering. ETFs are precluded from issuing debt or preferred shares.

ETFs are structured to shield investors from capital gains better than CEFs or open-end funds are.