The closed-end fund market is clearly changing. Between 2011 and July 2015, the number of CEFs had fallen 20% from 700 to only 565, according to Morningstar data. The growing exchange-traded fund market may be capturing some investors who may otherwise eye CEFs. During the same period, the number of ETFs on the market jumped to more than 1,700.
Individual investors have often viewed CEFs as an oddball instrument of the investment world. Few investors know much about them, and they’re not commonly held in portfolios. Shares are only issued at the initial public offering, and they trade in real time on a market at a premium or discount to the net asset value. A CEF is neither a stock nor a mutual fund nor an ETF.
Anne Kritzmire, managing director of closed-end funds and global structured products at Nuveen Investments, suspects much of that decline is due to consolidation. As at many investment companies, Nuveen has been merging products as larger funds benefit shareholders by creating more liquidity, more flexibility and better bid-ask spreads on the shares. “We’ve also saved shareholders millions in management fees on several funds that we’ve merged,” Kritzmire says. “Consolidation certainly is part of the story.”
Chris Cook, president of Beacon Capital Management in Dayton, Ohio, doesn’t like CEFs primarily because of their pricing structure with premiums and discounts to the NAV. “It’s about the pricing, not necessarily whether we like the underlying holdings of the fund or the management itself,” he says. “There are some good funds, but you’ve got to consider the price you’re paying.”
Although CEFs do offer advantages over traditional mutual funds because they can trade during the day, investors can now find that capability in ETFs, Cook says. As have many investors, Cook has gravitated toward low-cost ETFs. “People are becoming very aware of costs and realize they’re one of the top predictors in performance,” he says, “and many ETFs are working out as a primary tool for many.”