Types of CEFs

These CEFs focus on high-quality instruments including treasuries, government agencies and investment-grade corporate bonds, all of which generate interest income that is taxable by the federal government. Others may mix lower-grade "high yield bonds" into the portfolio, or even emphasize high yield bonds for their attractive rates of return (at somewhat higher risk levels).

This category, which focuses on common stocks traded on U.S. exchanges, comprises some of the oldest closed-end funds in the market. These funds typically build portfolios consisting of stocks issued by a broad mix of companies and diversified across many industries, geographic regions and economic sectors. Some diversified equity funds specialize in a particular asset class or investment style, such as large-cap, small-cap, growth or value. Diversified equity closed-end funds often pursue objectives similar to growth or growth and income mutual funds.

These closed-end funds focus on stocks of a given industry such as banking, media, natural resources or health care, or on specialized securities such as preferred stocks or convertible securities. They can be a way to participate in the fortunes of an economic sector, industry group or specialized security, while reducing risk by investing in many different companies.

Closed-end funds offer counterparts to the mutual funds that build globally diversified portfolios of stocks or fixed-income instruments. Funds which mix U.S. and foreign securities are called "global" while those that focus on non-U.S. investments only are considered "international." Some closed-end funds specialize in emerging market securities, which can be highly volatile and somewhat illiquid under adverse market conditions. Since closed-end funds are not forced to sell from their portfolios to meet redemptions, they may offer special advantages over mutual funds in such markets and may offer access to markets that are difficult for mutual funds to invest in, given their liquidity considerations.

One area in which closed-end funds have grown is "single-country" investing. Currently there are over 80 single-country funds specializing in stocks traded in countries involving Korea, India, Mexico, Spain and Germany among others. The closed-end fund structure gives the portfolio manager freedom to devise a long-term strategy and hold positions through periodic declines which may impact stocks in these markets. The goal of most single-country funds is to produce superior capital appreciation over holding periods of several years.