Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

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

Overnight Avg Rate Latest Change Last Week
30 yr fixed3.65%3.67%
15 yr fixed2.78%2.78%
5/1 ARM2.99%2.96%
30 yr refi3.69%3.71%
15 yr refi2.81%2.81%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 17,830.76 -210.79 -1.17%
Nasdaq 4,805.29 -57.85 -1.19%
S&P 500 2,075.81 -19.34 -0.92%
Treasuries 1.86 0.02 1.36%
Data as of 8:40am ET
Company Price Change % Change
Ford Motor Co 14.09 0.43 3.15%
Facebook Inc 116.73 7.84 7.20%
Apple Inc 94.83 -2.99 -3.06%
Bank of America Corp... 14.79 -0.23 -1.53%
Freeport-McMoRan Inc... 12.66 0.01 0.08%
Data as of Apr 28

Sections

The Australian government said a deal for a Chinese company to take control of the Kidman beef company is "contrary to the national interest." More

The eurozone economy grew 0.6% in the first three months of the year compared to the previous quarter, easily outpacing both the U.S. and the U.K. More

Visa says new software will allow consumers to check out with chip cards as fast as swiping a card with magnetic strip. More