What Is a Closed-End Fund?

A closed-end fund is a type of investment company whose shares are listed on a stock exchange or traded in the over-the-counter market. The assets of a closed-end fund are professionally managed in accordance with the fund’s investment objectives and policies, and may be invested in equities, bonds, and other securities. The market price of a closed-end fund share fluctuates like that of other publicly traded securities and is determined by supply and demand in the marketplace.

A closed-end fund is created by issuing a fixed number of common shares to investors during an initial public offering. Subsequent issuance of common shares can occur through secondary or follow-on offerings, at-the-market offerings, rights offerings, or dividend reinvestments. Closed-end funds also are permitted to issue one class of preferred shares in addition to common shares. Preferred shares differ from common shares in that preferred shareholders are paid dividends but do not share in the gains and losses of the fund. Issuing preferred shares allows a closed-end fund to raise additional capital, which it can use to purchase more securities for its portfolio.

Once issued, shares of a closed-end fund generally are bought and sold by investors in the open market and are not purchased or redeemed directly by the fund, although some closed-end funds may adopt stock repurchase programs or periodically tender for shares. Because a closed-end fund does not need to maintain cash reserves or sell securities to meet redemptions, the fund has the flexibility to invest in less-liquid portfolio securities. For example, a closed-end fund may invest in securities of very small companies, municipal bonds that are not widely traded, or securities traded in countries that do not have fully developed securities markets.

Total Assets of Closed-End Funds

At year-end 2016, 530 closed-end funds had total assets of $262 billion (Figure 4.1). This total was little changed from year-end 2015, as losses from falling municipal bond prices were offset by rising domestic stock prices.

Historically, bond funds have accounted for a large share of assets in closed-end funds. At year-end 2006, 59 percent of all closed-end fund assets were held in bond funds with the remainder held in equity funds (Figure 4.2). At year-end 2016, assets in bond closed-end funds were $160 billion, or 61 percent of closed-end fund assets. Equity closed-end fund assets totaled $101 billion, or 39 percent of closed-end fund assets. These shares have remained relatively stable, in part because of two offsetting factors. Cumulative net issuance of bond closed-end fund shares has exceeded that of equity fund shares over the past nine years. In addition, total returns on US bonds,* which averaged 4.4 percent annually, were not much lower than total returns on US stocks, which averaged 5.0 percent annually from 2007 through 2016.

The number of closed-end funds available to investors has declined steadily since 2011 (Figure 4.1). In each of the past five years, more closed-end funds were liquidated and others converted into open-end mutual funds or exchange-traded funds than new closed-end funds were launched.

* As measured by the Citigroup Broad Investment Grade Bond Index.
As measured by the Wilshire 5000 Total Return Index (float-adjusted).


Figure 4.1

Total Assets of Closed-End Funds Were $262 Billion at Year-End 2016

Billions of dollars; year-end, 2006–2016

Figure 4.1

 

Download an Excel file of this data.

Note: Total assets is the fair value of assets held in closed-end fund portfolios funded by common and preferred shares less any liabilities besides preferred shares.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”


Figure 4.2

Composition of the Closed-End Fund Market by Investment Objective

Percentage of closed-end fund total assets, year-end 2006 and 2016

Figure 4.2

Download an Excel file of this data.

Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”

Net Issuance of Closed-End Funds

Net issuance of closed-end fund shares decreased to $922 million in 2016 from $1.7 billion in 2015, as investor demand for equity closed-end funds waned (Figure 4.3). Equity closed-end funds had net redemptions—for the first time since 2009—of $254 million in 2016 compared with net issuance of $1.2 billion in 2015. Meanwhile, net issuance for bond closed-end funds increased to $1.2 billion from $486 million in 2015. Demand for new shares of taxable bond closed-end funds strengthened in the second half of 2016, despite a substantial rise in interest rates over this period.

Figure 4.3

Closed-End Fund Net Share Issuance

Millions of dollars; annual, 2007–2016*

 Total Equity Bond
TotalDomesticGlobal/
International
Total Domestic
taxable
Domestic
municipal
Global/
International
2007 $28,369   $24,608 $4,949 $19,659   $3,761 $1,966 -$880 $2,675
2008 -22,298 -8,739 -7,052 -1,687 -13,560 -6,770 -6,089 -700
2009 -3,259 -2,520 -2,366 -154 -739 -788 -238 287
2010 5,430 2,054 1,995 59 3,376 1,900 1,119 357
2011 6,018 4,466 3,206 1,260 1,551 724 825 2
2012 11,385 2,953 2,840 113 8,432 3,249 3,102 2,081
2013 13,713 3,554 4,097 -543 10,159 3,921 -220 6,459
2014 4,935 4,314 3,819 494 621 266 567 -212
2015 1,676 1,190 148 1,043 486 678 -87 -104
2016 922 -254 -40 -214 1,176 1,228 446 -498

Download an Excel file of this data.

* Data are not available for years prior to 2007.
Note: Components may not add to the total because of rounding. Net share issuance is the dollar value of gross issuance (proceeds from initial and additional public offerings of shares) minus gross redemptions of shares (share repurchases and fund liquidations). A positive number indicates that gross issuance exceeded gross redemptions. A negative number indicates that gross redemptions exceeded gross issuance.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”

Closed-End Fund Distributions

In 2016, closed-end funds distributed $16.2 billion to shareholders (Figure 4.4). Closed-end funds may make distributions to shareholders from three possible sources: income from interest and dividends, realized capital gains, and return of capital. Income from interest and dividends made up 69 percent of closed-end fund distributions, with the majority of income distributions paid by bond closed-end funds. Return of capital comprised 21 percent of closed-end fund distributions, and capital gains distributions accounted for 10 percent.

Figure 4.4

Closed-End Fund Distributions

Percentage of closed-end fund distributions, 2016

Figure 4.4

Download an Excel file of this data.

* Income distributions include payments from interest and dividends.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”

Closed-End Fund Leverage

Closed-end funds have the ability, subject to strict regulatory limits, to use leverage as part of their investment strategy. The use of leverage by a closed-end fund can allow it to achieve higher long-term returns, but also increases risk and the likelihood of share price volatility. Closed-end fund leverage can be classified as either structural leverage or portfolio leverage. At year-end 2016, at least 338 funds, accounting for 64 percent of closed-end funds, were using structural leverage, certain types of portfolio leverage (tender option bonds or reverse repurchase agreements), or both as a part of their investment strategy (Figure 4.5).

Figure 4.5

Closed-End Funds Are Employing Structural and Certain Types of Portfolio Leverage

Number of funds; end of period, 2013–2015, 2016:Q1–2016:Q4

Figure 4.5

Download an Excel file of this data.

1 Components do not add to the total because funds may employ both structural and portfolio leverage.
2 Structural leverage affects the closed-end fund’s capital structure by increasing the fund’s portfolio assets through borrowing and issuing debt and preferred stock.
3 Portfolio leverage results from particular types of portfolio investments, including certain types of derivatives, reverse repurchase agreements, tender option bonds, and other investments or types of transactions. Data are only available for reverse repurchase agreements and tender option bonds. Given data collection constraints, and the continuing development of types of investments/transactions with a leverage characteristic (and the use of different definitions of leverage), actual portfolio leverage may be materially different from what is reflected above.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”

Structural leverage, the most common type of leverage, affects the closed-end fund’s capital structure by increasing the fund’s portfolio assets. Types of closed-end fund structural leverage include borrowing and issuing debt and preferred shares. At the end of 2016, 297 funds had a total of $49.8 billion in structural leverage, with slightly more than half (53 percent) from preferred shares (Figure 4.6). Forty-seven percent of closed-end fund structural leverage was other structural leverage. The average leverage ratio* across those closed-end funds employing structural leverage was 26.6 percent at year-end 2016.

Among closed-end funds employing structural leverage, the average leverage ratio for bond funds was somewhat higher (28.4 percent) than that of equity funds (21.2 percent).

* The leverage ratio is the ratio of the amount of preferred shares and other structural leverage to the sum of the amount of common assets, preferred shares, and other structural leverage.


Figure 4.6

Preferred Shares Comprised the Majority of Closed-End Fund Structural Leverage

Percentage of closed-end fund structural leverage, year-end 2016

Figure 4.6

Download an Excel file of this data.

1 A closed-end fund may issue preferred shares to raise additional capital, which can be used to purchase more securities for its portfolio. Preferred stock differs from common stock in that preferred shareholders are paid income and capital gains distributions, but do not share in the gains and losses in the value of the fund’s shares.
2 Other structural leverage includes bank borrowing and other forms of debt.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”

Portfolio leverage results from particular portfolio investments, such as certain types of derivatives, reverse repurchase agreements, and tender option bonds. At the end of 2016, 159 closed-end funds had $18.0 billion outstanding in reverse repurchase agreements and tender option bonds (Figure 4.7).

Figure 4.7

Use of Portfolio Leverage

Billions of dollars; end of period, 2013–2015, 2016:Q1–2016:Q4

Figure 4.7

Download an Excel file of this data.

Note: Portfolio leverage results from particular types of portfolio investments, including certain types of derivatives, reverse repurchase agreements, tender option bonds, and other investments or types of transactions. Data are only available for reverse repurchase agreements and tender option bonds. Given data collection constraints, and the continuing development of types of investments/transactions with a leverage characteristic (and the use of different definitions of leverage), actual portfolio leverage may be materially different from what is reflected above.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”

Characteristics of Households Owning Closed-End Funds

An estimated 2.8 million US households owned closed-end funds in 2016. These households tended to include affluent investors who owned a range of equity and fixed-income investments. In 2016, 92 percent of households owning closed-end funds also owned equity mutual funds, individual stocks, or variable annuities (Figure 4.8). Seventy-four percent of households that owned closed-end funds also held bond mutual funds, individual bonds, or fixed annuities. In addition, 46 percent of these households owned investment real estate.

Because a large number of households that owned closed-end funds also owned stocks and mutual funds, the characteristics of closed-end fund owners were similar in many respects to those of stock and mutual fund owners. For instance, households that owned closed-end funds (like stock- and mutual fund–owning households) tended to be headed by college-educated individuals and tended to have household incomes above the national median (Figure 4.9).

Nonetheless, households that owned closed-end funds exhibited certain characteristics distinguishing them from mutual fund–owning households. For example, households with closed-end funds tended to have greater household financial assets (Figure 4.9). Also, 35 percent of households owning closed-end funds were retired from their lifetime occupations, compared with 24 percent of households owning mutual funds.

Figure 4.8

Closed-End Fund Investors Owned a Broad Range of Investments

Percentage of closed-end fund–owning households holding each type of investment, mid-2016

  
Equity mutual funds, individual stocks, or variable annuities (total) 92
Bond mutual funds, individual bonds, or fixed annuities (total) 74
Mutual funds (total) 90
    Equity 86
    Bond  56
    Hybrid  42
    Money market  66
Individual stocks 78
Individual bonds 37
Fixed or variable annuities 39
Investment real estate  46

Download an Excel file of this data.

Note: Multiple responses are included.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”


Figure 4.9

Closed-End Fund Investors Had Above-Average Household Incomes and Financial Assets

Mid-2016

 All US
households
Households
owning
closed-end
funds
Households
owning
mutual
funds
Households
owning
individual
stocks
Median
Age of head of household1 51 54 51 53
Household income2 $55,000 $125,000 $94,300 $100,000
Household financial assets3 $85,000 $450,000 $200,000 $300,000
Percentage of households
      Household primary or co-decisionmaker for saving and investing
        Married or living with a partner 58 69 73 73
        Widowed 9 10 6 6
        Four-year college degree or more 33 54 50 50
        Employed (full- or part-time) 62 64 76 76
        Retired from lifetime occupation 28 35 24 24
    Household owns
        IRA(s) 34 78 63 62
        DC retirement plan account(s) 47 73 85 74

Download an Excel file of this data.

1 Age is based on the sole or co-decisionmaker for household saving and investing.
2 Total reported is household income before taxes in 2015.
3 Household financial assets include assets in employer-sponsored retirement plans but exclude the household’s primary residence.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2016”

Back to Top