Another advantage of the closed-end fund requires a longer explanation, including how different types of funds create and redeem shares and how they are priced.
-- An open-ended mutual fund's share price is called the net asset value (NAV). It is calculated once a day. For U.S. funds, this is at 4 p.m. ET each day stock markets are open. At that time, an open-ended mutual fund's NAV is calculated by dividing the value of all its investments and cash by the number of shares. That is also the only time an investor can buy or sell shares. Both are done at the NAV. If an investor sells shares of the fund, they are redeemed by the fund, and cash is paid to the investor. If an investor buys shares, they are created at that moment. So on a day when redemptions outweigh purchases, the fund could be forced to liquidate some of its investments to raise cash to pay the sellers. This means an open-ended fund will keep some cash on hand to be ready for that action.
-- An exchange-traded fund also calculates its NAV at the market close each day. But it also has a separate share price (known as the market price), since its stock can be traded when the market is open. The market price is typically very close to the NAV. But it is possible for the market price to be higher or lower than the NAV. If, at a certain point, the market price is at a significant premium to the NAV, a market maker will decide that the fund should issue new shares to reduce demand and lower the market price closer to the NAV. If the market price is at a significant discount to the NAV, the market maker will decide that the fund should redeem shares, to increase demand and bring the market price closer to the NAV.
