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What is a Closed-End ETF?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 16 April 2018
  • Copyright Protected:
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    Conjecture Corporation
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A closed-end ETF is a specific type of fund that traders and investors should know about when they are choosing funds to add to an existing portfolio. The closed-end ETF has specific characteristics that relate to its status as an exchange traded fund (ETF). It also has more common features that result from its “closed-end” methodology, as opposed to an “open-end” fund.

The difference between closed-end an open-end funds is particularly instructive for those who are figuring out how a closed-end ETF works. An open-end fund is generally more liquid, less volatile, and not as easily traded within a market day. These differences create diverse attraction to these two fund types.

In looking at closed-end ETFs and other closed-end ETF funds, experts point out that the process of issuing an Initial Public Offering, or IPO, and putting a fixed amount of shares into a market makes a close-end fund less vulnerable to volume issues if traders all try to redeem their shares at once. Closed-end funds, by contrast, rely on a fixed volume that is publicly traded, so they are sometimes seen as more transparent. A closed-end ETF has the advantage of offering intraday trading, so that the trader can buy or sell in real-time, rather than waiting until the end of the trading day.

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One of the issues with closed-end ETF offers relates to what experts call a Net Asset Value (NAV). This value represents the price of the fund at the end of the trading day. Since open-end funds have a set NAV, this will be a constant for purchase. The closed-end fund, on the other hand, may trade during the day at prices different from the ultimate NAV. Traders call a NAV above sale price “trading at a discount,” and a low NAV “trading at a premium.”

Some trading professionals also point out that the volatility of closed-end ETFs is part of what drives some investors away from them. A closed-end ETF can have specific leveraging built into the fund, so that it can produce bigger gains, but ultimately these funds are also vulnerable to bigger losses. It’s important for investors to know the facts about everything that they are considering for their portfolios, so that they can make the most educated and informed choices about what kinds of risks they want to be exposed to in the hunt for long or short term gain.

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