3 Ways to Earn 5% to 9% from Closed-End Funds

The trick to these investments is to buy in when they trade below the underlying net asset value of their holdings.

Traditional mutual funds and exchange-traded funds are "open end" because there is theoretically no limit to the number of shares sponsors can issue to satisfy investor demand. By contrast, closed-end funds have a set number of shares outstanding at any moment. CEFs raise capital by going public via an initial public offering. Fund managers then use the money raised to buy stocks, bonds or other investments. If managers are successful, over time, the value of assets in the fund should grow and the shares' value should rise. But the day-to-day price of CEF shares is a function of investor demand–which means the share price at any time could trade above or below the per-share value of the assets. For many investors, the attraction is buying when shares trade below the value of the assets–that is, at a discount.

Earnings for All

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Tom Petruno
Contributing Writer, Kiplinger's Personal Finance
Petruno, a former financial columnist for the Los Angeles Times, is an independent investor, writer and consultant. He lives in L.A.