ETF Cousins; Closed-Ended Country Funds

A close relation to exchange-traded funds are closed-ended funds. Both trade on exchanges like a stock and can be bought and sold at any time during the trading day.

There are several important differences that investors should be aware of and monitor. First, closed-ended funds are actively managed and do not track an index. This has tax implications and also leads to higher fees. In addition, because a fixed amount of shares are on the market, demand for these shares results in closed-ended funds trading at a premium or discount to the fund's net asset value. This variance can be substantial. For example, here are some closed-ended funds that I monitor and sometimes use as proxies for country ETFs in our seven model portfolios.

Jardine Fleming China Region, (JFC) (16.2% discount), Malaysia Fund, (MF) (10.5% discount), Thai Fund (TF), ( 2.5% premium), Morgan Stanley China A Share (CAF), (20.6% discount), Morgan Stanley India Fund (IIF) (13.9% discount). It is important to look at the history of premiums or discounts and see if there is a pattern.

Jonathan Chatfield has a nice website which provides investors with information about the world of closed-ended funds. Oftentimes, the pattern of companies and weightings are better than market cap weighted ETFs and worth the extra cost.

By Carl Delfeld of the Chartwell ETF Advisor