Closed-End Funds vs Open-End Funds (Investing in CEFs)

We're taking a look at closed-end funds vs open-end funds to determine which is a better investment. Specifically, we'll talk about the benefits of investing in CEFs and what to look for in the process.

00:00 - Intro
0:26 - Open-End Funds Explained
2:44 - Closed-End Funds Explained (Benefits of CEFs)
4:50 - Closed-End Funds vs Open End Funds
5:54 - Investing in Closed-End Funds (What to Look For)
6:16 - CEFs & Diversification
7:09 - CEFs & Leverage
7:48 - CEFs & Costs / Fees
8:43 - CEFs & Taxes

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LINKS & RESOURCES

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While most investment funds fall into the "open end" category, closed-end funds offer unique advantages that may help you earn better returns, larger dividends and at a discounted price!

Open-end funds are the most common type of fund, which can include things like ETFs, index funds and mutual funds. Open-end funds get their name because they are always open to receiving new capital and new investments. As a result, they are able to continuously issue new shares as new investors become interested in the fund.

Open-end funds track their NAV much better, which means less volatility and a fair entry price for generally all investors. But, they have their drawbacks, too.

The problem with open-end funds is that they are typically exchanged directly with the financial firm who issues the fund. This means you can't sell your shares on an exchange - only back to the fund issuer. In order to meet this requirement, the fund issuer has to maintain a cash supply that can fulfill the needs of investors. If a large number of investors come to redeem their shares, the firm must have enough cash to purchase all of those shares!

Unfortunately, this means that the fund has to keep some of its assets as cash at all times - meaning 5% to 10% of your investment won't actually be invested - it'll just be sitting as cash! This means lower returns for you!

With closed-end funds (CEFs), as you might've guessed, they're NOT open to new investments and capital. They raise capital with an IPO, and cannot acquire any new capital in the future (without accumulating debt) and have a finite number of shares. This creates a few differences for the investment compared to an open-end fund.

Closed-end funds trade on an exchange like any other stocks. This means they're susceptible to market price action, and can therefore trade at a premium or a discount to their NAV. This means you can actually get the underlying assets at a discount by investing into a closed-end fund!

Plus, without any obligations to buy shares back from investors, CEFs can invest 100% of their assets, promising higher returns compared to an open-end fund with an otherwise identical portfolio. Additionally, they'll be able to return in a wider variety of investments because they're not locked into liquidity requirements like open-end funds.

In summary:

Open-End Funds:
• Always accepting capital
• Traded directly with investment firms
• Must keep cash on hand, so not 100% invested
• This also means slightly lower returns
• But price tracks NAV closely

Closed-End Funds:
• Capital raised at IPO
• Only trade on exchanges
• No liquidity obligations, so typically 100% invested
• More investment options
• Can trade at a premium or discount

But closed-end funds are not automatically a better investment! There's more to consider before you jump into one of these funds.

CEF DIVERSIFICATION
Some CEFs focus on specific assets or strategies - if you don't want to overweight your portfolio, make sure you check out the underlying assets.

CEF LEVERAGE
Many CEFs employ leverage. This can enhance returns, but it also increases risks. Plus, the costs of leverage will be passed onto you.

CEF COSTS & FEES
You'll pay the interest expenses on any debt the CEF uses, plus the management fees that the fund charges. This can add up fast, so be sure to explore the costs involved!

TAX CONSEQUENCES
Some CEFs offer tax-free income through municipal bonds. Others will be taxed as capital gains or income. Be sure to investigate, and beware of excessive returns of capital!

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DISCLAIMER: NOT FINANCIAL ADVICE.
The content in this video should not be used as the basis for any investment decision, as it is for entertainment purposes only. Additionally, some of the links contained in this description are affiliate links. I may earn a commission via Amazon, M1 Finance or Robinhood should you choose to purchase or sign up at the links provided.

Видео Closed-End Funds vs Open-End Funds (Investing in CEFs) канала Tyler McMurray