ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Comparing ETF's vs Closed-End Funds ???

Updated on May 15, 2012

The ETF Market

The difference between a traditional exchange traded fund (ETF) and an actively managed closed end fund are several. However, there are certain basic features that one should understand before utilizing these solutions as investment options. The first thing you should understand is what an ETF actually is. An ETF simply stated is a mutual fund that tracks a specific market index such as the S&P 500 index. ETF’s have been created to provide an investment option for just about every major market index that exists. For those investors who wish to take a passive approach to investing, they are an extremely low cost solution. In the case of the S&P 500 index for example, once can buy the I-shares version ( symbol IVV) with an annual expense ratio of as little as 0.09%.

Keep in mind that the average large cap mutual fund attempting to outperform the S&P 500 typically carries and expense of over 1.00%. That is more than ten times the cost. Part of the reason these solutions have become so popular is the low internal expenses. Yet index funds have been around for some time. So why the explosion in the ETF market ??? A big part of the reason is liquidity. An ETF trades like a stock on an exchange between investors and can be traded throughout the day, which allows those whom wish to actively trade in the market much greater flexibility. Whereas a traditional index fund sells shares directly from the fund company to the shareholders, then subsequently buys the shares back when you wish to sell. This in turns requires the investor to wait until the 4PM closing price to exit or enter the market.

What about a closed-end fund ???

The difference here is that a closed end fund trades on an exchange much like and ETF. This in turn allows for the same degree of liquidity when it comes to intra-day trading. Yet these solutions can be quite misleading to the novice investor. A closed-end fund actually has a fund manager much like a traditional actively managed fund. This means that the low cost components associated with ETF’s does not exist. You are essentially once again paying the higher fees for fund management and internal trading costs. In many cases the fees can actually be higher than a traditional mutual fund. The reason is there is actually a premium you must pay for the liquidity. Keep in mind that mutual fund companies earn more as their assets grow. Assets grow based on both positive market performance, as well and new money being invested into a fund. Since a closed end fund issues an initial number of shares at the public offering, those shares are finite. They are then traded amongst individual investors. So a major revenue source, (the ability to sell new shares) is eliminated. We recently saw this when PIMCO recently released an exchange traded version of it’s Total Return bond fund managed by the famous Bill Gross. PIMCO actually charges a higher expense ratio then they do on their traditional mutual fund shares. Many investors are unaware of this and mistakenly associate these types of closed end funds with the low cost ETF market place. So if intra-day trading is not a priority to you and you seek active management, you’d be better off with a traditional mutual fund.

With a closed-end fund it's also important to note that it is quite common for these investments to trade at a fairly significant premium or discount to their net asset value (NAV). Simply put when you add up the value of the underlying investments bought by the fund manager, it may be quite different than what the fund is trading for in the market place. Some can trade as much as 20% below or above NAV. While this may create an opportunity for you to buy securities at a steep discount, you may also be substantially overpaying for them as well. In a traditional open ended mutual fund, the funds closing price at 4pm always reflects the precise NAV without any premium or discount.

Lastly, a major component to closed end funds that is vastly different from an ETF is its ability to use leverage in the fund. Essentially the fund managers can borrow on margin to purchase a larger portfolio to try and increase dividend yield and net return. This however creates not only greater expenses, but also potentially much greater volatility. Ironically many client’s whom would never on their own borrow on margin to purchase an investment, are doing so unwittingly with closed end funds. In many cases the effective leverage in a closed-end funds portfolio can be as high as 50%-60%. An excellent resource to research such positions should you own them would be


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)