Exchange traded funds (ETFs) and closed-end funds (CEFs) on the surface may seem similar – they’re transparent baskets of stocks – but look closer. They’re different tools that operate in different ways, and it’s worth understanding.
The resemblance that ETFs share with CEFs is causing some confusion among investors. Both ETFs and CEFs are traded on a stock exchange, contain a portfolio of instruments, and try to track a particular theme. But from there, they diverge.
- An ETF is a portfolio of stocks, bonds, options, and/or other instruments that trade as one stock on a stock exchange. They are designed to closely track a particular index, sector or group.
- A CEF and an ETF can appear very similar at first, but they have differences. The term “closed” means that once the capital is raised for the fund, no more shares are available for investors. It is “closed” to new investment.
- ETFs by and large are passively managed and CEFs are actively managed.
- The exact portfolio that makes up the ETF is public knowledge all day, every day, whereas the ingredients in a CEF are not always publicly known at all times.
- CEFs rarely trade near their net asset value (NAV) and premiums or discounts are not unusual. [PowerShares Has an ETF of CEFs.]
For more stories about closed-end funds, visit our CEFs category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.