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Open-end and closed-end funds have a lot in common. They both typically exist as mutual funds, are professionally managed and can be used to build diversified portfolios.
But there are some key differences between open-end and closed-end funds investors should be aware of.
What is an open-end fund?
An open-end fund creates new shares when someone makes a purchase and removes shares from circulation when someone makes a sale. There is no limit to the number of shares that can be issued in an open-end fund.
Most mutual funds are open-end funds and can be purchased through an online broker or directly from the fund company. Open-end funds are bought and sold at their net asset value, or NAV, which is calculated at the end of each trading day. For this reason, open-end funds can only be bought and sold at the end of each day, so if you place an order after the market has closed, you’ll receive the next trading day’s closing NAV for your price.
Types of open-end funds
Most mutual funds are open-end funds. When you buy a mutual fund, new fund shares are issued to you, and are then retired when you sell the shares. Exchange-traded funds (ETFs) also tend to be open-end funds, but they can also be structured as unit investment trusts (UITs).
ETFs trade throughout the day similar to stocks, whereas mutual funds are only traded at their NAV at the end of the day.
What is a closed-end fund?
Closed-end funds, which are lesser known but more than a century old, have a fixed number of shares and are traded among investors on an exchange. Like stocks, their share prices are determined according to supply and demand, and they often trade at a discount or premium to their NAVs.
Closed-end funds might trade at a premium or a discount for a number of different reasons. A really talented fund manager who has a track record of outperforming the market might cause the fund to trade at a premium, while a fund with large unrealized capital gains might trade at a discount because of the potential tax liability. That discount may also be a result of investors anticipating declines in the fund’s holdings, especially in unpopular sectors.
When closed-end funds trade at a discount to NAV, they can give investors the opportunity to profit from the closing of that discount. Some professional investors even specialize in buying closed-end funds trading at discounts and then liquidating the fund’s assets to profit off the difference.
There were 441 closed-end funds with combined assets of $252 billion at the end of 2022, according to the Investment Company Institute.
Types of closed-end funds
Closed-end funds can contain a variety of different securities, but most closed-end funds are bond funds, according to ICI, accounting for about 61 percent of closed-end fund assets at the end of 2022. The remaining 39 percent are equity closed-end funds.
Key differences between open-end and closed-end funds
While open-end and closed-end funds both typically come in mutual-fund form, there are some key areas of difference between the two funds.
- Shares – In an open-end fund, shares are issued and retired on a regular basis, with new shares being issued to a purchaser of the fund or retired when someone wants to sell. A closed-end fund issues its shares only when the fund is launched, and any new investors must buy shares from existing investors, so supply and demand determine the fund’s price.
- Trading – In an open-end mutual fund, shares can be bought and sold at the end of each day at the fund’s closing NAV, whereas closed-end funds trade based on supply and demand throughout the day and can trade at either a premium or discount to the fund’s NAV.
- Popularity – Open-end funds are significantly more common than closed-end funds. Closed-end funds had just $252 billion in assets at the end of 2022, according to ICI, compared to trillions for open-end funds.
Bottom line
Open-end and closed-end funds differ mostly in how they’re bought and sold. Closed-end funds trade more like stocks, driven by supply and demand, while open-end funds trade at the end of each trading day at their NAV.
— Mary Wisniewski wrote a previous version of this story.
FAQs
Key differences between open-end and closed-end funds
What is the difference between open and closed-end funds? ›
An open-end mutual fund issues new shares whenever an investor chooses to buy into it and repurchases them when they're available. A closed-end fund issues shares only once. Closed-end funds also tend to use leverage, or borrowed money, to boost their returns to investors.
Which is better open ended or closed ended mutual funds? ›
The big difference between open ended and closed ended mutual funds is that open-ended funds always offer high liquidity compared to close ended funds where liquidity is available only after the specified lock-in period or at the fund maturity.
Are ETFs open or closed ended? ›
ETFs are open-ended funds, meaning they can constantly take on new investors and as they do, the fund's assets grow.
What are examples of open-ended funds? ›
US mutual funds, UK unit trusts and OEICs, European SICAVs, and hedge funds are all examples of open-ended funds. The price at which shares in an open-ended fund are issued or can be redeemed will vary in proportion to the net asset value of the fund and so directly reflects its performance.
Why are closed-end funds not popular? ›
A closed-end fund's liquidity depends on investor supply and demand, so it can be less liquid than an open-end fund. These funds are also subject to increased volatility because shares can trade above or below their NAV. Another potential drawback is that many closed-end funds use leverage.
What is the downside to closed-end funds? ›
Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund's investment objective will be achieved.
What is the most common open-end fund? ›
Therefore, the biggest difference between the two most common types of open-end funds — mutual funds and ETFs — is simply that you can trade ETFs 24/7 like stocks, but you can only purchase or redeem mutual fund shares at the market close at that day's closing NAV.
Can closed ended mutual funds lose value? ›
Inherent in all closed-end bond funds are market risk and credit risk. Market risk involves the potential impact of increasing interest rates, which could lead to a decrease in the value of the fund's bond holdings.
Why choose closed-end funds? ›
Closed-end funds (CEFs) can invest in specialized, less liquid corners of the market where open-end funds may not venture, such as alternative securities, real estate, and private placements. They enable individual investors to gain exposure to assets many could not access any other way.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
What happens to ETFs if a bank fails? ›
Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.
Are closed-end funds safe? ›
Equity Securities Risk: Closed-end funds that invest in common stock and other equity securities are subject to market risk. Those equity securities can and will fluctuate in value for many different reasons.
Is a REIT a closed-end fund? ›
REITs are a fine way to get exposure to real estate. But why pay retail for them if you don't have to? The Nuveen Real Estate Income Fund (JRS, $7.91) is one of the best closed-end funds that invests in REITs.
What is a typical closed-end fund? ›
Closed-end funds generally issue a fixed number of shares that are listed on a stock exchange or trade in the over-the-counter market. The assets of a closed-end fund are professionally managed in accordance with the fund's investment objectives and policies, and may be invested in stocks, bonds, and other assets.
Is a hedge fund open or closed-ended? ›
Investment Structure: Most hedge funds are open-ended, meaning that investors can continually add or redeem their shares in the fund at any time. Private equity funds, on the other hand, are closed-ended, meaning that new money cannot be invested after an initial period has expired.
Why would you buy a closed-end fund? ›
Closed-end funds (“CEFs”) can play an important role in a diversified portfolio as they may offer investors the potential for generating capital growth and income through investment performance and distributions.
Why are open ended funds better? ›
An open-end fund provides investors with an easy, low-cost way to pool money and buy a diversified portfolio. Investment goals for open-end funds include holding growth, income, large-cap, and small-cap stocks, among many others. The funds can target specific industries or countries.
Is it safe to invest in closed-end funds? ›
Most are seeking solid returns on their investments through the traditional means of capital gains, price appreciation and income potential. The wide variety of closed-end funds on offer and the fact that they are all actively managed (unlike open-ended funds) make closed-end funds an investment worth considering.
What do you mean by open ended funds? ›
An open ended fund means a mutual fund scheme that is open for buying / selling at any time. In other words, you can buy / sell units of open ended fund schemes at any time. There is no maturity period in open ended funds, which means that you can remain invested in the scheme for as long as you want.
