Types of Holdings

Closed-End Funds

Closed-End Funds are mutual funds similar to the more widely-used open-end funds in that they may afford shareholders increased diversification.  This is because a single share can represent ownership in hundreds of stocks or bonds.

They are unlike open-end Funds in that they trade shares like common stocks on a secondary market. When you buy shares in a closed-end fund, you are buying them from someone else. Open-end funds act like continuous IPO (Initial Public Offerings) in that all shares purchased result in additional investments by the fund managers. Closed-end fund share prices move all day and the buyer and seller receive the price at the time of the purchase or sale. Open-end funds trade on the share price at the end of the day, after the market close has affected the prices of all the stocks owned by the fund. A good example of why this is important is when folks dump their shares on a bad (down) market day. Owners of closed-end fund shares are out as soon as the sale order is filled. If on a declining day, an open-end fund share owner tries to dump his shares early in the day to avoid further losses, he will not. He will sell his shares at the end-of-the-day price, after all the damage has been done, no matter when the sale order was entered.

Closed-end funds tend to have lower expenses (ratios) associated with their operation than open-end funds. Lower expense ratios mean higher returns to the shareholders. For example, a closed-end, fixed-income fund (purchased to provide cash flow to an account through dividends) will almost always pay higher dividends than a similar open-end fund because of the difference in expenses.

Closed-end funds also allow the client and advisor more flexibility when it comes to realizing gains and losses.

Exchange-Traded Funds

Exchange-Traded Funds, or ETFs, have been described as “closed-end funds on steroids” by some in the industry. Like closed-end funds and common stocks, they trade shares on the secondary market. The reasons for why this is important are discussed in the second paragraph on the closed-end funds.

ETFs are becoming increasingly popular and like closed-end funds offer the advantages of improved diversification and liquidity.

ETFs also tend to have lower expense ratios than open-end funds and most tend to be passively managed, meaning they follow and automatically adjust to an index. The indices followed by ETFs can be as mainstream as the S&P 500 or as specific as a domestic wind-energy index.