Definition
Closed-end funds raise capital through an IPO and trade on exchanges like stocks. Unlike open-end mutual funds, they do not issue or redeem shares based on investor demand, so market price diverges from NAV. Many CEFs use leverage (30-40%) to enhance income. Persistent discounts to NAV create potential value opportunities for patient investors.
lightbulb Example
A municipal bond CEF uses 35% leverage to boost its 4% portfolio yield to 6.2% distribution yield. It trades at a 10% discount to NAV, meaning investors buy $1.00 of assets for $0.90. Total return potential includes discount narrowing + leveraged income.
verified_user Key Points
- Fixed share count—trades on exchange
- Can trade at significant premiums or discounts to NAV
- Many CEFs use leverage to enhance income
- Discount narrowing is an additional return source