Understanding closed-end fund expenses

By George Mannes, Money magazine


NEW YORK (Money magazine) -- Question: Why do closed-end funds often have higher expenses than regular open-end mutual funds do? -- Derry Eynon, Fort Collins, Colo.

Answer: You're right that closed-end funds - which, unlike the more common open-end variety, issue a fixed number of shares and trade throughout the day like stocks - have higher expense ratios on average than standard funds.

That's partly because they can't easily gain economies of scale by adding shares. Another reason: They have more leeway to invest borrowed money.

Since a fund's management fee is calculated as a percentage of the amount of assets managed - not money invested - that larger portfolio means higher closed-end expenses per share.

About 88% of closed-end bond funds are leveraged, as well as about half of closed-end stock funds. For investors, this leverage can boost yields on bond funds and income-oriented stock funds, and returns on any type of fund. But it also creates additional risk, says analyst Cecilia Gondor of Thomas J. Herzfeld Advisors.

Also, while regular mutual fund shares are priced to exactly match the value of a fund's underlying assets, swings in market demand for a closed-end fund's limited number of shares can push their price above or below their net asset value (NAV).

Currently closed-end shares are on average discounted about 2% from their NAV. Sounds nice, but actually they're more expensive than their historical average discount of 4%.  To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.77%3.73%
15 yr fixed2.95%2.93%
5/1 ARM3.01%3.03%
30 yr refi3.84%3.80%
15 yr refi3.05%3.01%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 18,085.45 47.48 0.26%
Nasdaq 5,063.40 3.15 0.06%
S&P 500 2,111.63 2.71 0.13%
Treasuries 1.96 0.04 1.82%
Data as of 11:59am ET
Company Price Change % Change
Apple Inc 132.08 -0.57 -0.43%
Microsoft Corp 48.99 0.96 2.00%
Applied Materials In... 20.11 0.14 0.70%
Bank of America Corp... 15.60 0.04 0.26%
Ford Motor Co 15.86 -0.04 -0.28%
Data as of 11:44am ET

Sections

Market timing is hard. And making investing decisions based on the calendar is just silly. If you sold in May and went away for the past three years, you missed out on stocks going up. More

A major earthquake was the last thing Nepal needed. Even before one of the country's major fault lines rumbled to life, the country was beset by challenges. More

SilverTech Ventures is a new accelerator that offers perks like free office space and access to its founders' extensive networks. More

At elite schools across the country, low-income students feel like outsiders and are working to make it better. More