CEFs versus ETFs and Mutual Funds - Fidelity (2024)

FAQs

Are CEFs better than ETFs? ›

CEFs, while costing more because they are mainly actively managed, can trade at a discount to their NAV. Investors looking for standard, safer investment strategies would do well choosing an ETF, whereas investors looking for alpha returns may do better with a CEF. Fidelity. "Closed-end Funds vs.

Like a traditional mutual fund, a CEF invests in a portfolio of securities and is managed, typically, by an investment management firm. But unlike mutual funds, CEFs are closed in the sense that capital does not regularly flow into them when investors buy shares, and it does not flow out when investors sell shares.

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

On Fidelity.com, you can now screen for and compare different types of Closed End Funds (CEFs).

Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund's investment objective will be achieved.

Most are seeking solid returns on their investments through the traditional means of capital gains, price appreciation and income potential. The wide variety of closed-end funds on offer and the fact that they are all actively managed (unlike open-ended funds) make closed-end funds an investment worth considering.

ETFs have a redemption/creation feature, which typically ensures the share price doesn't stray significantly from the net asset value. As a result, an ETF's capital structure is not closed. CEFs do not have such a feature. CEFs are actively managed, whereas most ETFs are designed to track an index's performance.

Differences between ETFs and CEFs include the following: Fees — Closed-end funds typically have higher expenses and management fees than exchange-traded funds. In contrast, exchange-traded funds have a lower expense ratio than CEFs since they do not charge management fees.

CEFs trade on an exchange. This means that they have a share price, which is set by the market. These 2 prices, the NAV and the share price, are rarely the same, and when they are, it's only by coincidence. The differences between the share price and the NAV create discounts and premiums.

ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.

Why would I buy a mutual fund instead of an ETF? ›

Unlike ETFs, mutual funds can offer more specific strategies as well as blends of strategies. Mutual funds offer the same type of indexed investing options as ETFs but also an array of actively and passively managed options that can be fine-tuned to cater to an investor's needs.

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

Many closed-end funds employ leverage, meaning they borrow funds, to increase returns. The math works like this. Say you can borrow money at a 3% short-term rate and invest it in longer-term assets returning 7%. Using those numbers, you're making 4% annually on the borrowed funds.

The maximum commission amount charged to clients for equity trades, including closed-end funds, is a percentage of Principal Value (PV) ranging from 0.50% to 2.50%, depending on the Principal Value of the trade.

Generally, shareholders of closed-end funds must pay income taxes on the income and capital gains distributed to them. Each closed-end fund will provide an IRS Form 1099 to its shareholders annually that summarizes the fund's distributions.

But to be clear, Ramsey's all in favor of using ETFs when used properly. For investors who can use ETFs as part of a long-term, buy-and-hold investment program, rather than as trading vehicles, Ramsey has nothing bad to say about them.

Excluding a handful of exceptions, CEFs themselves do not pay taxes. Instead, like open-end mutual funds and ETFs, CEFs pass the tax consequences of their investments onto their shareholders.

In the current environment, CEFs trade at historically large discounts, double digits in many cases. In other words, you can buy $1 worth of assets for 90 cents or less. And by paying a lower price, an investor gets a higher yield; you get the income from the full dollar of assets, for which you paid only 90 cents.