Back to Top

This chapter describes recent closed-end fund developments and provides a profile of the U.S. households that own them.

Closed-end funds are one of four types of investment companies, along with mutual (or open-end) funds, exchange-traded funds (ETFs), and unit investment trusts. Closed-end funds generally issue a fixed number of shares that 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 stocks, bonds, and other securities.

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 closed-end fund shares 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 reinvestment. 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 2014, 568 closed-end funds had total assets of $289 billion (Figure 4.1). The number of closed-end funds available to investors remains below its peak of 662 at the end of 2007 due to the effects of mergers, liquidations, and conversions. Although total assets at year-end 2014 were up nearly 4 percent ($10 billion) from year-end 2013, they have not fully recovered to the 2007 peak of $312 billion. Three factors have limited the growth in both the assets and the number of closed-end funds in recent years. First, several closed-end funds have repurchased shares through tender offers over the past few years, reducing the number of outstanding shares and the size of assets under management. Second, a few closed-end funds have liquidated each year and others have converted into open-end mutual funds or ETFs. Third, closed-end fund preferred share assets have declined since the financial crisis of 2008.

Figure 4.1

Total Assets of Closed-End Funds Increased to $289 Billion at Year-End 2014

Billions of dollars; year-end, 2004–2014

Figure 4.1

Download an Excel file of this data.

Historically, bond funds have accounted for a large share of assets in closed-end funds. A decade ago, 68 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 2014, assets in bond closed-end funds were $170 billion, or 59 percent of closed-end fund assets. Equity closed-end fund assets totaled $119 billion, or 41 percent of closed-end fund assets. These relative shares have shifted, in part because cumulative net issuance of equity closed-end fund shares has exceeded that of bond fund shares over the past eight years. In addition, total returns on U.S. stocks* averaged 8.1 percent annually from year-end 2004 to year-end 2014, while total returns on bonds averaged 4.8 percent annually.

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

Figure 4.2

Equity Funds’ Growing Share of the Closed-End Fund Market

Percentage of closed-end fund total assets, year-end 2004 and 2014

Figure 4.2

Download an Excel file of this data.

Note: Components do not add to 100 percent because of rounding.

Net Issuance of Closed-End Funds

Net issuance of closed-end fund shares slowed substantially to $4.8 billion in 2014 from $13.7 billion in 2013, as investor demand for bond closed-end funds waned (Figure 4.3). Net issuance of bond closed-end funds fell to $427 million in 2014 from $10.2 billion in 2013. In contrast, demand for equity closed-end funds strengthened further in 2014 with net issuance amounting to $4.3 billion, up from $3.6 billion in 2013 and $3.0 billion in 2012. As in the previous six years, net issuance of domestic equity closed-end funds accounted for the bulk of the equity fund net issuance.

Figure 4.3

Closed-End Fund Net Share Issuance1

Millions of dollars, 2007–20142

  Equity Bond
  Total Total Domestic Global/
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 11,315 2,953 2,840 113 8,362 3,249 3,032 2,081
2013 13,742 3,554 4,097 -543 10,188 3,921 -155 6,423
2014 4,766 4,339 3,844 494 427 105 533 -212

Download an Excel file of this data.

1 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.
2 Data are not available for years prior to 2007.
Note: Components may not add to the total because of rounding.

Closed-End Fund Distributions

In 2014, closed-end funds distributed $17.1 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 75 percent of closed-end fund distributions, with the majority of income distributions paid by bond closed-end funds. Return of capital comprised 13 percent of closed-end fund distributions, and capital gains distributions accounted for 11 percent.

Figure 4.4

Closed-End Fund Distributions

Percentage of closed-end fund distributions, 2014

Figure 4.4

Download an Excel file of this data.

* Income distributions include payments from interest and dividends.
Note: Components do not add to 100 percent because of rounding.

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 2014, at least 372 funds, accounting for 65 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 Employing Structural and Certain Types of Portfolio Leverage

Number of funds; quarterly, selected quarters

Figure 4.5

Download an Excel file of this data.

1 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.
2 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.
Note: Components do not add to the total because funds may employ both structural and portfolio leverage.

Structural leverage, the most common type, 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 2014, 319 funds had a total of $50.7 billion in structural leverage, with a little more than half (53 percent) of those assets 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 26.0 percent at year-end 2014. Among bond funds employing structural leverage, the average leverage ratio was somewhat higher (28.2 percent) than that of equity funds (19.4 percent) employing structural leverage.

* 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 2014

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.

Portfolio leverage is leverage that results from particular portfolio investments, such as certain types of derivatives, reverse repurchase agreements, and tender option bonds. At the end of 2014, 195 closed-end funds had $20.0 billion outstanding in reverse repurchase agreements and tender option bonds (Figure 4.7).

Figure 4.7

Use of Portfolio Leverage

Billions of dollars; quarterly, selected quarters

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.

Characteristics of Households Owning Closed-End Funds

An estimated 3.4 million U.S. households owned closed-end funds in mid-2014. These households tended to include affluent, experienced investors who owned a range of equity and fixed-income investments. In mid-2014, 92 percent of households owning closed-end funds also owned equity mutual funds, individual stocks, or variable annuities (Figure 4.8). Sixty-eight percent of households that owned closed-end funds also held bonds, bond mutual funds, or fixed annuities. In addition, 43 percent of these households owned investment real estate.

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-2014

   
Equity mutual funds, individual equities, or variable annuities (total) 92
Bond mutual funds, individual bonds, or fixed annuities (total) 68
Mutual funds (total) 89
  Equity 85
  Bond  51
  Hybrid  44
  Money market  66
Individual equities 72
Individual bonds 31
Fixed or variable annuities 36
Investment real estate  43

Download an Excel file of this data.

Note: Multiple responses are included.

Because a large number of households that owned closed-end funds also owned individual equities and mutual funds, the characteristics of closed-end fund owners were similar in many respects to those of individual equity and mutual fund owners. For instance, households that owned closed-end funds (like individual equity- and mutual fund–owning households) were more likely than all households to be headed by college-educated individuals and had 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 significantly greater household financial assets (Figure 4.9). Thirty-three percent of closed-end fund–owning households were retired from their lifetime occupations, compared with 23 percent of households owning mutual funds.

Figure 4.9

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

Mid-2014

  All U.S.
households
Households
owning ETFs
Households
owning
mutual funds
Households
owning
individual equities
Median
Age of head of household1 51 51 51 53
Household income2 $50,000 $100,000 $85,000 $90,000
Household financial assets3 $75,500 $350,000 $200,000 $330,000
Percentage of households
  Household primary or co-decisionmaker for saving and investing
    Married or living with a partner 58 69 73 72
    Widowed 9 10 5 7
    Four-year college degree or more 32 53 49 52
    Employed (full- or part-time) 60 69 77 72
    Retired from lifetime occupation 28 33 23 29
  Household owns
    IRA(s) 34 72 62 63
    DC retirement plan account(s) 46 68 85 72

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 2013.
3 Household financial assets include assets in employer-sponsored retirement plans but exclude the household’s primary residence.