What is a Closed-End Fund?
A closed-end fund is basically a cross between a mutual fund and a common stock. The fund raises capital through an initial public offering, and it then uses the proceeds to invest in a basket of securities. This basket is hand-selected by professional managers, and it typically concentrates on a specific industry, country, region, or sector.

Unlike mutual funds, closed-end funds are listed on one of the major U.S. exchanges. You can buy shares in a closed-end fund directly from your broker, and when doing so, you can generally expect to pay the same commissions you'd pay to buy a normal stock off the exchange. Better still, closed-end funds trade throughout the normal trading day, so you can buy and sell shares anytime you wish.

In addition, there are no minimum investment requirements. You can buy closed-end fund shares in any amount you desire. Many are highly liquid and trade hundreds of thousands of shares every day.

Closed-end fund managers also don't have to cope with a constant influx and redemption of cash investments. When a fund lists on the exchange, it raises a certain amount of capital just like a normal stock in an initial public offering (IPO). Investors in a closed-end fund can't ask for their investment back -- they can only buy and sell their shares in the open market. Transactions in the open market don't affect the actual cash the company has on hand to invest.

This means closed-end fund managers essentially have a fixed pile of cash to work with. They don't have to cope with the daily inflows and outflows of cash that mutual fund managers do. As a result, their expenses and fees are typically much lower than for mutual funds -- often as low as 0.75% of assets annually.

And, of course, closed-end funds offer many of the same advantages as mutual funds. These include instant diversification and professional management expertise.

Like mutual funds too, these funds offer investors a chance to invest in many different market segments -- some funds focus on particular international markets, different industry groups, or specific strategies such as income investing. In fact, one of the big benefits of closed-end funds is that they can give investors access to high-yielding global stocks that would be very difficult for individual U.S. investors to buy directly. (More on this in a moment.)

A Profitable Quirk
There is one major feature of closed-end funds that all investors should be aware of. This feature, if fully understood, can offer advantages to the astute investor. However, if not taken into consideration, it can be detrimental. Specifically, I'm speaking of the concept of premiums and discounts.

Closed-end funds trade on the major exchanges just like stocks. Their price is determined not by the value of the investments they hold, but instead by the supply and demand for each fund's shares. Let's illustrate with a simple example: suppose you hold a closed-end fund that owns 100 shares of IBM trading at $100 per share. The value of that investment is $10,000. This figure is referred to as the fund's net asset value (NAV). Furthermore, let's assume that the closed-end fund in question has a total of 1,000 traded shares. In this particular example, the fund's NAV per share would be $10.

However, just because the fund's investments are worth $10 per share does not necessarily mean that the closed-end fund will trade at $10. If investors sell the fund's shares en masse, then the price of the fund on the market could well drop to $9 -- in this case, the fund would be trading at a 10% discount to its NAV. On the flip side, if investors, caught in a bullish mood, decide to aggressively buy the shares, then the fund could trade up to $11 or $12 per share. In this type of situation, the fund could sell at a premium to its NAV.

Although it might seem as though closed-end funds should trade at or near their NAV at all times, in practice this is definitely not the case. In the past, I've seen funds trade at premiums or discounts of more than +/- 20% of NAV for short periods of time.

Over the long term, however, closed-end shares do tend to revert to their NAV. With this in mind, it's a good idea to buy funds that are trading either at discounts to their NAVs or at levels very close to their NAV. If you can buy a fund at a discount, then you're essentially buying that fund's assets -- the stocks and bonds held by the fund -- at a bargain price. In this case you stand to profit if and when that discount window is ultimately closed.

Using Foreign Closed-End Funds to Capture High Yields
Over 93% of the world's highest-yielding stocks are located in foreign markets.  But taking advantage of those securities is no easy task -- it's often difficult for U.S. investors to purchase foreign stocks directly.

However, the good news is that investors can gain easy access to high-yield stocks by investing in closed-end funds.  And right now, a select handful of foreign-focused funds are dishing out enormous double-digit dividend yields.

In a recent issue of my monthly newsletter, High-Yield International, my staff and I provided an in-depth profile of three high-yielding funds. Among them, a closed-end fund that's delivering an impressive 9.2% yield and is benefiting from one of the fastest growing economic regions in the world -- Asia.  This fund is also selling at a bargain price, trading at a 13.9% discount to its NAV. 

I also found a Spanish fund that's delivering a mouth-watering 10% yield. At first glance, this Old World country may not seem like a terribly exciting place to invest. However, Spain is actually delivering some of the best returns on the planet.  The Spanish market has skyrocketed over the past five years, and this fund has followed suit, returning +32.8% per year.

If you'd like to learn the name of these securities -- plus receive a steady stream of foreign stocks, funds and other investing ideas with abnormally high dividend yields each month -- then I'd like to extend you a personal invitation to try my premium international investing newsletter . . . High-Yield International.  Please visit this link to learn more.

Nick Lanyi
Editor
High-Yield International

About High-Yield International

High-Yield International is a monthly investment newsletter focused on bringing subscribers the highest-yield securities in the world. By focusing solely on those securities trading outside of the United States, this newsletter offers a host of relatively unknown investment options that you probably won't find coverage of anywhere else. Many of these securities provide investors with annual dividend yields of 10%, 15%, even 20% or more, while also outperforming the major U.S. averages. 

About Nick Lanyi

Nick Lanyi has spent 17 years researching and analyzing money-making opportunities for three of the most widely read investment advisory services in history. At Louis Rukeyser's Wall Street, Nick spent the better part of a decade as Rukeyser's trusted lieutenant, covering the entire investment waterfront. Earlier, Nick refined his touch at Fidelity Insight, a leading mutual-fund newsletter, and wrote for the venerable general-interest financial newsletter, Personal Finance.

Nick has been quoted in the Wall Street Journal, Boston Globe, Chicago Tribune, Bloomberg and Forbes.com. He has also appeared on CNN/fn and CNBC.

To learn more about Nick Lanyi's premium investing newsletter -- High-Yield International -- please visit this link.