Compared with mutual funds, closed-end funds offer benefits to investors. They trade like stocks so managers don’t have to be concerned with redemptions and don’t need to hold a great deal of cash. Over a long time period, cash holdings such as money market funds likely will have lower returns than the stocks and bonds where closed-end funds put their money.
Closed-end funds also avoid the timing problems that redemptions can bring. That is, money often flows into mutual funds at market tops, leading to high-priced buys, and flows out near market bottoms, when the fund could use cash to buy bargains. That’s not an issue with redemption-free closed-end fund.
What’s more, closed-end ETFs generally sell at a premium or discount to the securities they hold. Today, many closed-end funds sell at discounts. Investors have pulled money out of some closed-end funds managed by the same companies that have been named in the mutual fund scandals. As demand for these funds has dropped, discounts have grown larger. Buying closed-end funds at a discount may be an excellent choice for investors.
