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I am almost entirely invested in open ended mutual funds. I am now interested in exploring ETF's and closed end funds. I have very a basic question. Can one look at a closed end fund as essentially an actively managed ETF?. Are there closed end index funds? If so then what is the rational in choosing one over an ETF?
P.S. my interpretation of the last sentence is that you would be one of the few people interested in a CEF or indexed funds, because they might not might not serve much purpose.
Most closed-end funds should be avoided by individual investors. They are instruments designed by investment banks to be sold to small individual investors at their initial offering by retail brokers for a sizeable imbedded commission. What makes them closed-ended is that once the initial offering is complete, no more assets enter or leave the fund from the sale or purchase of shares. Instead, the closed-end fund trades like a stock or an ETF, but that is where the similarity to ETF's ends. The actual Net Asset Value (NAV) of the CE fund may lag or exceed the share price of the fund, and very often trades at a significant discount to the NAV.
An open-end fund will issue new shares to a purchaser at the end of any trading day at NAV, and will liquidate the shares of a seller at NAV. There is no discount or premium in an open-end fund, which is a continuous "new offering." A vanilla ETF tracks an index and can deliver out underlying shares of stocks from its portfolio to institutional sellers, creating arbitrage opportunities that keep the NAV very close to the share price of a high volume ETF. This makes them excellent low-cost index tracking investments, often with greater tax efficiencies than open-end index funds.
The discount and premium dynamic of closed-end funds often produces very wide price fluctuations that have little or nothing to do with the underlying value of the fund's portfolio. This dynamic is often exacerbated by the emotional reactions of the small retail investors that make up much of the closed-end fund investor base, and so at a time when everyone is dumping muni bonds, for example, the closed-end muni funds will be trading at a steep discount to NAV, or their actual worth.
Profiting from big discounts is not as easy as it looks. If you're intrigued by the profit potential of closed-end funds, I would suggest an open-end fund that invests in them, such as one of the River North Funds (RNCOX and RNDLX).
There is no index closed end fund. Can you imagine index funds trading at premium and discount to the NAV? Since closed end funds cannot issue new shares except for IPO, the will be premiums and discounts. The only way you could obtain shares in normal times by buying them from someone else. But instead of buying someone else's shares you can buy an ETF or open-end index mutual fund with the same index and do not deal with that premium/discount issue. So, I doubt fund companies will ever come up with Closed-End index funds.
agree with a lot of your arguments to a point. Yes, it is a poor idea to buy a closed end fund at the IPO. But the dynamic of discounts and premiums could be used, if studied, for better entry and exit points.
also, one advantage that CEFs have over ETFs and open ended mutual funds is that the manager doesn't have to sell assets during market panic thus taking permanent loss of capital (unless they are excessively leveraged). When people dump cefs in panic (just like in your muni example), they loose their premium or deepen their discount while underlying holdings are intact. Thus, CEFs are great for less liquid asset classes, such as distressed debt, munis, micro caps and emerging and frontier markets.
again, this is a separate animal, always actively managed, and should be studied before jumping in. i am in no way an expert, but i started picking these up in the fall of 2008 and have since built some understanding.
Being somewhat obsessed on technical definitions, let me start by stating, then ignoring, a more narrow description of ETFs (see http://www.sec.gov/answers/etf.htm): Most ETFs are technically open end funds, because they are continuously available for sale or redemption from the sponsor (albeit only to authorized participants - mere mortals have to buy shares on the secondary market). There are a few funds, like SPY, that are structured as unit investment trusts. The point of looking at this definition is to see that even from a very narrow, mechanical perspective, ETFs and CTFs are significantly different (independent of the type of management).
Now let's get a bit more lax in our definitions, and consider structures not registered under the 1940 Investment Company Act, such as commodity pools like SLV (iShares Silver) and unit trusts like GLD (SPDR gold) as ETFs. http://us.ishares.com/product_info/fund/overview/SLV.htm
If we broaden our perspective this way, then we do find an "index" CEF comparable to SLV - PSLV (Sprott Physical Silver Trust) - they both claim to hold silver bars. They're just following the tried and true indexing method of full replication - own exactly what you are tracking (here, silver), in the same proportions as in the index (here, 100%).
Finally, as to PIMCO - the company has been very clear that this is not to be considered a clone. (from M*):
"In today's filing, PIMCO does not disclose an expense ratio for the proposed ETF. However, the filing does alert investors to the fact that the proposed ETF's investments and results "are not expected to be the same as those made by other funds for which PIMCO acts as an investment adviser, including funds with names, investment objectives and policies similar to" the proposed ETF. Put another way, PIMCO is telling investors that the proposed ETF may be managed differently or trade after the mutual fund makes its trades. As a result, those investors who want to jump ship from PTRRX in search of a possibly lower fee from the ETF version may see different results. "
Comments
I believe that you mean that there is no such animal.
Burt S.
http://www.sec.gov/answers/mfclose.htm
read these verses on ETFs versus other vehicles
http://en.wikipedia.org/wiki/Closed-end_fund
http://www.investopedia.com/terms/c/closed-endinvestment.asp
http://www.site-by-site.com/usa/cef/cef.htm
http://www.herzfeld.com/whatisa.htm
P.S. my interpretation of the last sentence is that you would be one of the few people interested in a CEF or indexed funds, because they might not might not serve much purpose.
An open-end fund will issue new shares to a purchaser at the end of any trading day at NAV, and will liquidate the shares of a seller at NAV. There is no discount or premium in an open-end fund, which is a continuous "new offering." A vanilla ETF tracks an index and can deliver out underlying shares of stocks from its portfolio to institutional sellers, creating arbitrage opportunities that keep the NAV very close to the share price of a high volume ETF. This makes them excellent low-cost index tracking investments, often with greater tax efficiencies than open-end index funds.
The discount and premium dynamic of closed-end funds often produces very wide price fluctuations that have little or nothing to do with the underlying value of the fund's portfolio. This dynamic is often exacerbated by the emotional reactions of the small retail investors that make up much of the closed-end fund investor base, and so at a time when everyone is dumping muni bonds, for example, the closed-end muni funds will be trading at a steep discount to NAV, or their actual worth.
Profiting from big discounts is not as easy as it looks. If you're intrigued by the profit potential of closed-end funds, I would suggest an open-end fund that invests in them, such as one of the River North Funds (RNCOX and RNDLX).
It is interesting that recently PIMCO Total Return is bringing out a clone of this fund in an actively managed ETF.
Burt S.
also, one advantage that CEFs have over ETFs and open ended mutual funds is that the manager doesn't have to sell assets during market panic thus taking permanent loss of capital (unless they are excessively leveraged). When people dump cefs in panic (just like in your muni example), they loose their premium or deepen their discount while underlying holdings are intact. Thus, CEFs are great for less liquid asset classes, such as distressed debt, munis, micro caps and emerging and frontier markets.
again, this is a separate animal, always actively managed, and should be studied before jumping in. i am in no way an expert, but i started picking these up in the fall of 2008 and have since built some understanding.
Now let's get a bit more lax in our definitions, and consider structures not registered under the 1940 Investment Company Act, such as commodity pools like SLV (iShares Silver) and unit trusts like GLD (SPDR gold) as ETFs.
http://us.ishares.com/product_info/fund/overview/SLV.htm
If we broaden our perspective this way, then we do find an "index" CEF comparable to SLV - PSLV (Sprott Physical Silver Trust) - they both claim to hold silver bars. They're just following the tried and true indexing method of full replication - own exactly what you are tracking (here, silver), in the same proportions as in the index (here, 100%).
Now read Herb Greenberg's column on the absurd pricing of PSLV (I've followed Greenberg for years, since he was with the SF Chronicle - good writer):
http://www.cnbc.com/id/42418568/Greenberg_Is_the_Silver_More_Valuable_in_a_Silver_Closed_End_Fund_or_a_Silver_ETF
Finally, as to PIMCO - the company has been very clear that this is not to be considered a clone. (from M*):
"In today's filing, PIMCO does not disclose an expense ratio for the proposed ETF. However, the filing does alert investors to the fact that the proposed ETF's investments and results "are not expected to be the same as those made by other funds for which PIMCO acts as an investment adviser, including funds with names, investment objectives and policies similar to" the proposed ETF. Put another way, PIMCO is telling investors that the proposed ETF may be managed differently or trade after the mutual fund makes its trades. As a result, those investors who want to jump ship from PTRRX in search of a possibly lower fee from the ETF version may see different results. "