Business Economics

How To Find Bargains In Closed-End Funds

Some of the 482 funds in the Forbes Closed-End Fund Ratings are great buys. Most are dreadful places to put money. This article explains how to distinguish the good from the bad.

We scored closed-end funds on two metrics: past performance and cost. The performance grade is based on a simple comparison of ten-year results (for the funds that have been around that long) to those of similar funds. Just as important as past results—more important, if you subscribe to the philosophy of John Bogle—is the cost of a fund. That’s a trickier matter.

The expense ratio of a closed-end fund is just the starting point in a cost assessment. Also in play is the interaction between the distribution rate on a fund and the discount (or premium) at which the fund trades. Our ratings do the arithmetic for you. Below, we’ll take a look at what’s going inside our cost calculator.

The closed-end format, which commands $220 billion of customer money, is a somewhat unusual beast in the wilds of Wall Street. Although this species of investment company is the most ancient, it has been eclipsed in market share by the open-end (or mutual) fund and, more recently, the exchange-traded fund. Mutual funds and ETFs allow capital to flow in and out. Closed-ends don’t. Their capital is frozen in place.


This article originally appeared on Forbes