What are closed-end funds? Should I use them?
NoLoad FundX Answer:
Most investors are familiar with open-end mutual funds, which differ from closed-end funds primarily by how their shares are structured. An open-end mutual fund continually offers new shares. For every share that is purchased, a new share is created, and for every share that is redeemed, an existing share is cancelled out. The share price, calculated at the end of each day, is based on the value of the underlying securities and the number of shares outstanding at that time.
Closed-end funds have a fixed number of shares, determined at the initial offering. Because there are only a limited number of shares, closed-end funds have less liquidity than open-end funds. Investors in a closed-end fund can only sell their shares if a buyer is available for their shares.
If an open-end fund isn’t doing well, investors can always sell it, but if a closed-end fund isn’t doing well, investors may end up having to sell the fund at a discount to the value of the underlying securities. They will only receive as much as a buyer is willing to pay for those shares.
This lack of liquidity has steered us away from closed-end funds and we do not include them in NoLoad FundX. With Upgrading, we must be able to sell a fund and move on to a better performer when our signals tell us to.