Now that actively managed exchange traded funds (ETFs) are a reality, closed-end funds (CEFs) could begin seeing evolution in greater numbers.

Since the approval of the actively managed ETF, the CEFs that are trading below their net asset value (NAV) are leading managers to explore the possibility of opening them up into ETFs, reports Jesse Emspak for Investor’s Business Daily.

CEFs only issue a limited number of shares and new shares aren’t issued as investor demand grows, unlike ETFs. Prices aren’t determined by the NAV, but instead by investor demand. The fund represents an actively managed portfolio of securities, and they typically concentrate on a specific industry, sector or region.

Claymore/Raymond James SB-1 Equity Fund (RYJ) is one CEF exploring a conversion. The board of directors has approved it, and it has to be run by the shareholders.

RYJ actually had a provision for making it an open-ended fund: if it trades at a discount of 10% or more over 18 months, or at 10% or more for 75 days in a row, it will convert. It never met the criteria, though.

ETFs have more than twice the assets as CEFs do, so perhaps this is something we may see more of in the future.

Tags: Sector ETFs