Closed-End Fund Definition

A closed-end fund is a portfolio of pooled assets that raises a fixed amount of capital through an initial public offering (IPO) and then is listed on a stock exchange. Like a mutual fund, a closed-end fund has a professional manager overseeing the portfolio and actively buying and selling its assets; like an exchange-traded fund, it trades like an equity, its price fluctuating throughout the business day. The closed-end fund is unique in that, after its IPO, no additional shares are issued by the fund's parent investment company, nor will the fund itself redeem (buy back) shares. Instead, like individual stock shares, the fund can only be bought or sold on the secondary market.

A closed-end fund is also known as a "closed-end investment" or "closed-end mutual fund."

While a closed-end fund has several unique characteristics that distinguish it from an open-end fund, such as a mutual fund or exchange-traded fund (ETF), it also shares several similarities. Both closed-end funds and open-end funds are run by an investment advisor, a management team that trades the portfolio. Both also charge an annual expense ratio and can make income and capital gain distributions to shareholders.

A closed-end fund is organized as a publicly traded investment company, and both it and its portfolio manager have to be registered with the Securities and Exchange Commission (SEC). It tends to be actively managed (unlike most ETFs or index mutual funds), and its portfolio of securities typically concentrates on a specific industry, geographic market or sector.

However, closed-end funds differ from open-ended funds in fundamental ways. A closed-end fund raises a prescribed amount of capital only once through an IPO by issuing a fixed number of shares, which are purchased by investors. After all the shares are sold, the offering is "closed"—hence, the name, closed-end fund. No new investment capital flows into the fund. In contrast, mutual funds and exchange-traded funds constantly accept new investor dollars, issuing additional shares, and redeeming those from shareholders who wish to sell.

Going forward, closed-end funds are listed on a stock exchange and trade just like stocks, their prices changing throughout the day—in contrast to open-end mutual funds, which are priced only once at the end of the day. While the open-end fund's share price is based on the net asset value (NAV) of the portfolio, the stock price of a closed-end fund fluctuates according to market forces, such as supply and demand, as well as the changing values of the securities in the fund's holdings.

Because they trade exclusively in the secondary market, closed-end funds also require a brokerage account to buy and sell, while an open-end fund can often be purchased directly through the fund's sponsoring investment company.

One of the unique features of a closed-end fund is how it is priced. The net asset value (NAV) of the fund is calculated regularly. However, the price that it trades for on the exchange is determined entirely by supply and demand. This can lead to a closed-end fund trading at a premium of a discount to its NAV.

Closed-end funds can trade at premiums and discounts for a number of reasons. They may be focused on a popular sector. These funds may also trade at a premium if the fund is managed by a historically successful stock picker. Conversely, a lack of investor demand or a poor risk and return profile of the fund can lead to it trading at a discount to its NAV.

Because closed-end funds don't have to redeem investor shares, they don't have to maintain the cash reserve levels that open-ended funds do, leaving them with more to invest. They can also make heavy use of leverage. As a result, closed-end funds often offer higher returns or better income streams than their mutual fund counterparts.

The largest type of closed-end fund (evaluated by assets under management) is municipal bond funds, which invest in debt obligations of state and local governments and agencies. Managers of these funds often seek to broadly diversify in order to minimize risk, but also often rely on leverage to maximize returns. 

Managers also build global and international funds with stocks or fixed-income instruments worldwide. These include global funds, which combine U.S. and international securities; international funds, which purchase only non-U.S. securities; and emerging markets funds, which can be highly volatile and less liquid. 

One of the largest closed-end funds is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG). Founded in 2007, it has a market cap of $2.46 billion as of April, 2019. The primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation.