CEFs and Mutual Funds
While an index fund is one way to start following emerging markets, an investor with an interest in specific regions or countries, may want to managed funds, either mutual funds and closed-end funds, CEFs. In areas where risks and rewards are high, a managed fund can be a wise choice although it usually means paying more in fees.
CEFs have been around for decades but they don’t get the press that mutual funds and ETFs do. They are traded on the exchanges throughout the day just as stocks are, while the price for mutual funds or net asset value is set every afternoon at 4 P.M., eastern time. CEFs, unlike mutual funds, have a fixed number of shares. When investors pull out of a mutual fund, the manager is forced to liquidate holdings, which often isn’t advantageous to investors still in the fund.
Two figures are important in considering CEFs, net asset value and market value or share price. The net asset value refers to the underlying value of the securities held in the fund just as it does for mutual funds, while the market value indicates what investors are willing to pay for the shares. CEFs trade at a discount when the net asset value is greater than the share price, so it’s possible to shop for a bargain in CEFs. Some CEFs trade at a premium, which could be less than 1% or up to 50% or more. A high premium is likely to be a sell signal.