|
Something special is happening on June 23rd.
If you want behind-the-scenes updates and early access to our upcoming high-yield reports, join the High-Yield VIP List by leaving your email here.
Closed end funds are interesting because of their high yields and because they often let you buy a basket of stocks or bonds at a discount to their true value.
But what exactly is a closed end fund, and how do you pick the right ones?
Let’s teach you everything you need to know.
 |
What is a Closed End Fund?
A closed end fund is similar to a mutual fund.
A mutual fund is a pool of money where many investors put money together, and the fund manager invests it in things like stocks or bonds
A closed-end fund works similarly because it also owns a collection of investments, such as bonds, dividend-paying stocks, or other assets
But there’s one big difference.
A mutual fund keeps creating new units when people invest and removes units when people withdraw money.
Each unit gets priced at the end of the day, based on the value of the assets within the mutual fund.
A closed-end fund does not do that.
It creates a fixed number of shares at the beginning through an IPO (Initial Public Offering).
After that, those shares trade on the stock market like regular stocks.
So when you buy a closed-end fund, you are buying shares from another investor, not directly from the fund itself.
Because of this, the share price moves based on supply and demand, which means it can trade above or below the actual value of the investments inside the fund.
 |
How Do Closed End Funds Make Money?
A closed-end fund does not make money like a normal company that sells products or services.
Instead, investors earn returns in three main ways.
1. Income From Investments
The fund owns investments like bonds and dividend-paying stocks.
These investments generate income through:
Interest from bonds
Dividends from stocks
After expenses are paid, the fund distributes this income to shareholders.
2. Capital Gains
If the fund buys an investment at a lower price and later sells it at a higher price, the profit is called a capital gain.
Some of these profits may also be paid out to investors.
3. Discount Narrowing
This is one of the most unique features of closed-end funds.
Sometimes the fund’s shares trade below the value of the investments it owns.
For example:
Imagine the fund owns $1 worth of assets
But the market price is only 90 cents
That means you are buying $1 of assets for 90 cents.
If the discount later becomes smaller, your investment gains extra value even if the underlying investments do not change.
Why Investors Like Closed End Funds
Investors tend to like Closed End Funds due to the following reasons:
High distribution yields
Because closed end funds can use borrowed money and buy higher yielding assets, their payouts are often much larger than ordinary mutual funds.
Discount to net asset value
You can sometimes buy 1 dollar of assets for 90 or 85 cents. Th