INSIGHTS
By
Brad Atkins,
Chief Executive Officer
Oct 1, 2024
Discover a lesser known investment that raises fixed capital, enabling managers to pursue higher-yield strategies often offering unique income opportunities.
CEF Structure vs. Other Funds
1. Closed-End Funds vs. Mutual Funds:
Mutual Funds: Open-end structure, allowing for continuous inflows and outflows of capital based on investor demand. The fund can expand or shrink in size as investors buy or redeem shares. The price is always at the NAV.
Closed-End Funds: Fixed capital after the IPO, and shares trade on an exchange. Price fluctuates based on demand and can deviate from NAV.
2. Closed-End Funds vs. ETFs:
ETFs: Similar to CEFs in that they trade on exchanges, but most ETFs are passively managed and designed to track an index. ETFs can create and redeem shares, keeping their price closely tied to NAV.
CEFs: Actively managed with no share creation/redemption mechanism, leading to the possibility of trading at premiums or discounts to NAV.
Advantages of Closed-End Funds
Income generation: Often pay regular dividends and are popular with income-focused investors.
Leverage: Can enhance returns in a rising market.
Diversification: Access to a diversified pool of investments managed by professionals.
Discount Opportunities: Investors may find value by purchasing shares at a discount to NAV.
Disadvantages of Closed-End Funds
Market Risk: Share prices can fluctuate widely due to market sentiment, sometimes trading at a significant discount to NAV.
Leverage Risk: Leverage can amplify both gains and losses, making CEFs riskier during downturns.
Liquidity Risk: Although they trade on exchanges, some CEFs have low trading volume, which can impact liquidity.
Conclusion
Closed-end funds can be an excellent tool for investors seeking income, access to less liquid or specialized asset classes, and active management. However, they come with risks, particularly due to leverage and potential for share prices to deviate from NAV. Careful research is essential when selecting CEFs for a portfolio.
Disclosure:
© 2025 Morningstar, Inc. All rights reserved. The Morningstar Rating™ is for the Class A only; other classes may have different performance characteristics. The rating is not a recommendation to buy, sell, or hold the fund. Morningstar does not guarantee its accuracy or completeness and is not responsible for damages or losses arising from any use of this information.
Investors should consider the Fund’s investment objectives, risks, charges, and expenses before investing. The prospectus, containing this and other information about the Fund, should be read carefully before investing. The prospectus is available at the download icon below or by calling 800-711-9164. Current and future holdings are subject to change and risk.
Investments in the Fund are subject to investment risks, including the possible loss of some or all of the principal amount invested. There is no assurance that the Fund will be successful in meeting its investment objective. The Fund is subject to the following additional risks:
▪ Active Trading Risk: Active trading may result in added expenses, a lower return, and increased tax liability. Since the Fund’s advisor engages in high turnover trading strategies, the Fund will have high portfolio turnover rates.
▪ Closed-End Fund Risk: Closed-end funds (CEFs) are subject to investment advisory and other expenses, which will be indirectly paid by the Fund resulting in duplicative fees and expenses. CEFs are also subject to management risk because the advisor to the underlying CEF may be unsuccessful in meeting the fund’s investment objective.
▪ Equity Securities Risk: Equity securities are subject to changes in value, and their values may be more volatile than those of other asset classes. These changes in value may result from factors affecting individual issuers, industries, or the stock market.
More information about these risks can be found in the Fund's prospectus.
Vigilant Distributors, LLC., Member FINRA/SIPC. There is no affiliation between Modern Capital Management Co., including its principals, and Vigilant Distributors, LLC.
- No Bank Guarantee
- May Lose Value
- NOT FDIC-INSURED