Closed-End Funds

 

Exchange Traded Products (ETPs)

Characteristics

We offer a wide range of closed-end funds, including interval funds, from many different fund companies. An important step to take prior to investing in closed-end funds is to read the respective fund’s prospectus carefully. Each closed-end fund prospectus contains important information that will help you make an informed decision about an investment in a closed-end fund. In deciding whether to invest in a closed-end fund, you should consider several different factors, including the fund’s investment objective, investment strategies and risks, the investment adviser responsible for the management of the fund’s assets, and the fees and expenses associated with an investment in a particular closed-end fund.

Similar to mutual funds, closed-end funds are pooled investment vehicles. However, there are some important differences between these types of funds.

Unlike mutual funds, most traditional closed-end funds do not continuously offer their shares for sale. Instead, such funds typically sell a fixed number of shares through an initial public offering, after which their shares typically trade on a secondary trading market. The price of shares in a closed-end fund that trades on a secondary market after their initial public offering is determined by the market and may be higher or lower than the shares’ NAV. In addition, there are certain non-traded closed-end funds that do sell their shares on an ongoing basis, and do not trade on a secondary trading market.

Many closed-end funds have no “maturity” or termination date, and shareholders may exit their investments only by selling shares on the secondary trading market. Nonetheless, these closed-end funds without termination dates may still be terminated based on the investment manager’s decision. Certain other closed-end funds, however, have a specified or targeted termination date, at which time the shareholders receive an amount equivalent to the shares’ NAV at the termination date. Non-traded closed-end funds typically contemplate having a “liquidity” event at some point once the fund’s offering has ceased. Liquidity events include listing the fund’s shares on a secondary trading market and liquidation.

Unlike mutual funds, closed-end fund shares are not redeemable, which means that the fund is not required to buy shares back from investors upon request. Non-traded closed-end funds typically offer to repurchase their shares from investors in periodic tender offers. In addition, some closed-end funds, commonly referred to as “interval funds,” offer to repurchase their shares from investors at specified intervals.

The shares of an interval fund typically do not trade on a secondary market and interval funds generally offer their shares on a continuous basis at a price based on the fund’s NAV. In order to operate as an interval fund, the fund must offer to repurchase its shares at regular intervals every three, six, or twelve months, as disclosed in the fund’s prospectus. The price that interval fund shareholders receive on a repurchase will be based on the per share NAV determined as of a specified date, minus any redemption fees or charges that may apply to the transaction.

General Fees and Costs

You will typically pay a sales charge or load when you buy shares in a mutual fund. We receive a portion of this sales charge for our efforts and the efforts of our financial advisors in selling shares of the mutual fund.

Most mutual funds utilize multiple share classes, with differing fees and expenses for distribution and shareholder services. Common share classes available to you in a brokerage account are Class A and Class C. Each class typically has different fees and costs, and therefore fund performance results will differ as those fees and expenses reduce performance across share classes. You should also note that the amount of time you expect to hold your investment in a mutual fund plays an important role in determining which share class is most appropriate for you, and you should discuss this consideration with your financial advisor.

Fees and Costs

You will typically pay a sales charge when you buy shares in a closed-end fund’s public offering, or a commission if you buy and sell shares in a closed-end fund in a secondary trading market. You will pay this sales charge or commission in addition to the amount of the fund you choose to buy or sell. For a public offering purchase, the fund’s sales charge is a one-time fixed fee, which is typically a percentage of the investment amount, and usually ranges between 1% and 2% of the investment amount for closed-end funds. For a closed-end fund transaction in the secondary trading market, the commission is based on the same commission formula that we apply to purchases and sales of individual stocks.

  • For example, if you purchase $25,000 of shares in the initial offering of a closed-end fund that assesses a 2% sales charge on your investment, then a $500 sales charge will be deducted and the remaining $24,500 of your investment will be used to purchase shares in the closed-end fund’s initial offering. If you purchase 1,000 shares in a closed-end fund on a trading market at $25 per share, you will pay a $500 commission.

Some interval funds also charge you a redemption charge when you accept an interval fund’s offer to repurchase your shares. This redemption charge is a one-time fixed fee, typically 1-2% of the redemption proceeds. Unlike the sales charges and commissions, the redemption charge is not paid to us, but is paid to the fund to compensate it for expenses associated with the repurchase.

  • For example, if you own $50,000 of shares in an interval fund that assesses a 2% redemption charge, and you accept an interval fund’s offer to repurchase all of your shares, a $1,000 redemption charge will be deducted, and you will receive the remaining $49,000 as your redemption proceeds.

Closed-end funds, including interval funds, also deduct other ongoing fees and expenses, such as management fees, from fund assets. In addition, the ongoing fees and expenses of many interval funds include 12b-1 fees, and these 12b-1 fees are intended to finance distribution activities intended primarily to result in the sale of additional shares of the interval fund and include marketing and advertising expenses. These ongoing fees and expenses, which are reflected in the fund’s overall expense ratio, are typically used to pay for the fund’s continued operations, such as paying the fund’s investment manager, accounting and auditing expenses, legal expenses, and recordkeeping expenses.

These ongoing fees and expenses are typically charged daily as a percentage of your assets. You pay these fees and expenses indirectly because they are deducted from your assets on an ongoing basis. These payments, as well as the conflicts of interest associated with them, are described more fully below in this Reg BI Disclosure.

More Information

More information on the sales charges, ongoing fees and expenses, and overall expense ratio for closed-end funds, including interval funds, is available in the fund’s prospectus. You can request a copy of a fund’s prospectus from your financial advisor. Additionally, you can find information about closed-end funds on FINRA’s Investment Funds Resource Page.

Information about the commission fees you will pay BFE for closed-end fund transactions is available on our Equity and Option Commission Schedule.