CEF Commissions
Description
This article is from the A Guide to Closed-End Funds (CEFs).
CEF Commissions
One important reason why investors tend to shy away from CEFs are brokers and commissions. Many investors have never traded on the exchanges: instead, they may have bought mutual fund shares directly from the mutual fund company. Such transactions are simpler than dealing with a broker, and, in the case of no-load mutual funds, no commissions are involved.
With the advent of deep-discount brokers, commissions are not as significant as before. Many brokerages offer excellent terms for the small investor: flat fees (ranging from $18 to $30) for upto 5000 shares. For a round trip, on a transaction of 5000 shares of a typical CEF fund price of $10, the costs are miniscule: 0.12% ($60/$50,000). On a transaction of 1000 shares of a $10 CEF, the costs are small: 0.6% ($60/$10,000). On a transaction of 200 shares of a $10 CEF, the costs are comparable to a low-load fund: 3% ($60/$2000). Investors that buy and sell very small number of shares, however, may be better off with no-load mutual funds, since the commissions will represent a larger fraction of their investment.
Another important factor that many investors forget when comparing costs are the costs of operating the funds. The costs of investing are usually comparable for similar markets; however, CEFs tend to have a low turnover and, hence, lower operating costs, because they do not have to sell securities to meet redemptions. A more significant factor is advertising. Mutual fund managements do not necessarily have the same goals as their shareholders: management makes more money if they manage more assets. Often, the asset base is raised by extensive advertising, and this reflects in higher costs to the shareholder. Ever wonder why you have never seen a CEF advertisement? Advertising cuts into the assets under the CEF management without attracting new money. Obviously, the CEF management will minimize such costs, thereby, benefitting the shareholder.
In sum, the total costs of investing in CEFs and mutual funds are often comparable, even when the mutual fund may be no-load.
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