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 fixed4.26%4.48%
15 yr fixed3.30%3.31%
5/1 ARM3.30%3.35%
30 yr refi4.25%4.45%
15 yr refi3.29%3.34%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 16,390.49 127.93 0.79%
Nasdaq 4,079.39 45.23 1.12%
S&P 500 1,858.11 15.13 0.82%
Treasuries 2.64 0.01 0.49%
Data as of 12:29pm ET
Company Price Change % Change
Bank of America Corp... 16.04 -0.35 -2.14%
Facebook Inc 59.29 0.20 0.34%
Yahoo! Inc 36.50 2.29 6.69%
Intel Corp 26.92 0.14 0.54%
Alcoa Inc 13.28 0.23 1.75%
Data as of 12:14pm ET

Sections

Bank of America still feeling fallout of mortgage crisis. It shares down 3% after quarterly loss. More

Observers are warning that risks of a blow up in China's property market are rising, threatening a slowdown that could hurt global growth. More

Yahoo is still in the midst of its turnaround, but investors liked what they saw in the company's first-quarter results. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.