Closed-end funds vs. actively managed ETFs

Zagreb, capital of Croatia, HQ for closed-end fund manager OTP Bank.

By Tony Porcheron

Special to the Financial Independence Hub

The current popular conversation in investments is about Exchange Traded Funds (ETF) versus normal mutual funds. The conversation is always about low fees vs high fees. The one version that never seems to come up is about Closed-end Funds, which are the granddaddy of all managed money.

The brief history of the modern managed money industry — which included mutual fund, hedge fund, and exchange-traded fund (ETF) industries — started formally with The Investment Company Act of 1940.

It clearly defines the responsibilities and requirements of investment companies as well as the requirements for publicly traded investment product offerings including open-end mutual funds, closed-end mutual funds and unit investment trusts. It primarily targets publicly traded retail investment products.

The next major development was the first index fund. This was a Wells Fargo fund formed in 1971. In 1974, the first mutual fund index shares were offered to retail investors.

Finally, exchange-traded funds came along in 1993 with the invention of TIPs (Toronto Index Participation Units) on the TSX.

The ETF is now growing tremendously globally with investors looking for lower fees during strong market cycles.

You can now get ETFs in a variety of investment focuses, types, industries, countries, security selection bias, etc.

The majority of ETFs are passive, where the manager simply follows the direction of the fund outline with no or extremely little input from the manager. These ETFs are usually with the smallest fees down to less than 0.1% on large US Indexes or Fixed Income Funds. As the funds are very large and need little management input, they can still be very profitable for the fund companies to manage.

Actively managed ETFs

There are also ETFs that have an active management approach. The manager then has some or a tremendous amount of involvement in stock selection and management of the fund. Active ETFs are usually in sectors where it is difficult to get an index return or average. These would be in situations such as emerging markets, small or microcap stocks or sub investor grade fixed income.

The first money management structures that were set up pre 1940 and regulated after were Closed-end Funds (CEFs). These are funds listed on a stock exchange that have raised their capital in an IPO. The amount of capital in the fund then remains stagnant and only grows or decreases with market returns, management fee withdrawals or dividend or interest payments (as per the mandate in the prospectus). If the manager wishes to have more capital, he/she must complete a secondary offering to the stock market to raise more capital (similar to a normal common stock)

CEFs are not covered to the extent of mutual funds or stocks in the media, as very few people have a vested interest in a product where no compensation is paid for new sales.

CEFs are diverse and offer benefits that include:

  1. Income
  2. Tax Efficiency
  3. Simpler Tax Reporting
  4. Ease of Trading
  5. Opportunistic Flexibility


Closed End Funds Active ETF
Trading Market Trade Trade at Net Asset Value (NAV)
Capital Stable, raised at IPO and secondary raise New funds continually going in and out of the fun
Liquidity Can be illiquid depending on the Fund. Annual redemption at NAV Common Very liquid
Cash Efficiency No cash needed and can leverage depending on Prospectus Inefficient, Need cash to be held in fund for liquidity, new cash coming in that needs to be invested. Limited leverage.
Income Efficient steady income stream depending on prospectus due to stable capital Income usually lower do to inefficient cash holdings and less stable investments
Transparency Depending on the fund, full transparency but can be less active reporting due to size, investment industry following and media coverage Depending on the fund, usual very strong coverage due to large companies with strong media and industry coverage.
Tax Reporting Full reporting, all income and realized capital gains paid out annually. Full reporting, all income and realized capital gains paid out annually.
Markets Most major stock exchanges, focus on NY, London and Toronto Most major stock exchanges, focus on NY, London and Toronto
Fees Depending on the fund, 1 to 3%. Fixed Income to less efficient smaller markets where more due diligence needed Higher than passive ETF, but lower than closed end funds. Usual 0.5 to 1%
Opportunistic Shares can usually be purchased below their NAV. Shareholders then can be profitable based on NAV gap decrease and NAV growth Shares are always purchased and sold at or very close to NAV.
Media and Investment Coverage Limited to very little depending on the fund Some to very high coverage depending on the fund and sponsoring investment company.


The choice between an index ETF, active ETF and Closed End Fund is depending on your investment choices, portfolio makeup, needs and recommendations from professional advisors. The important thing is to be aware of all your options and do your research.

Tony Porcheron is Managing Director Global Products and Strategy at OTP Bank Group. OTP is one of the largest independent financial services providers in Central and Eastern Europe, with a full range of banking services for private individuals and corporate clients. OTP Group comprises large subsidiaries, granting services in the field of insurance, real estate, factoring, leasing and asset management, investment and pension funds.

The bank serves clients in 9 countries and has more than 36,000 employees serving 13 million clients in over 1,500 branches and through electronic channels on all the markets of the bank. OTP is the largest commercial bank in Hungary with over 25% market share. South and Eastern Europe is a Growing Stable region, partially part of Eurozone. OTP is expanding its asset management business globally and will be launching new investment products in 2019 and providing access to their existing funds.


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