Don’t Forget Closed-Ended ETFs
By Carl Delfeld of Chartwell ETF.com
For a variety of reasons, closed-ended funds can be a better play on a particular market then ETFs. The most obvious reason is that they often trade at a significant discount to net asset value. However, these discounts or premiums can persist over time so it is important to look at the historical pattern.
Next, most ETFs are baskets of companies that are weighted by their market value. With closed-ended funds, the portfolios are actively managed and while the same companies will likely be in both investment vehicles, the weighting will be different.
The fees are almost always significantly higher for closed-ended funds.
Below are two examples of funds that allow investors to buy into some well-known companies at a discount to their market value.
Boulder Growth&Income (BIF)
Selling at 23% discount to NAV. Blue chip holdings with 25% allocation to
Berkshire Hathaway.
Swiss Helvetia (SWZ)
24% discount to NAV and 40% of assets in Nestle, Roche and Novartis.
Here are some common questions that investors have about closed-ended funds.
What is a Closed-End ETF?
Like a traditional mutual fund, a Closed-End ETF is an investment company that pools the assets of its investors and uses professional managers to invest the money to meet clearly identified objectives, such as current income or capital appreciation. However, unlike a mutual fund, a Closed-End ETF issues a fixed number of shares through an initial public offering, and lists those shares on a national stock exchange such as the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX). Investors who wish to buy or sell fund shares do not purchase or redeem directly from the fund – rather, they buy or sell fund shares on the stock exchange in a process identical to the purchase or sale of any other listed stock.
Is a Closed-End ETF closed to new investments?
No. Although Closed-End ETFs have a fixed number of shares outstanding, investors can purchase and sell shares in Closed-End ETFs at any time during the trading day, similar to any other listed stock.
How do I buy/sell Closed-End ETFs?
Like mutual funds and stocks, Closed-End ETFs may be purchased in regular brokerage accounts (individual or joint-name), retirement plan accounts, trust accounts or custodial accounts. Closed-End ETFs can be purchased and sold on national exchanges just like any other stock. All the strategies associated with stocks, such as market orders, limit orders, stop orders, short sales, and margin buying can be used in the purchase and sale of Closed-End ETFs.
Is there a sales charge associated with purchasing shares?
No. Because Closed-End ETFs trade on national exchanges similar to stocks, there is no sales charge attributed to the transaction, although your broker will charge a commission for the stock purchase or sale.