A CEF refers to a close-end fund, which is a registered investment company similar to a mutual fund, unit investment trust or an exchange-traded fund. Just like mutual funds, the closed-ended funds also have an expense ratio which is regularly reported to investors. The expense ratio refers to the total cost to an investor for owning the shares in the CEF.

There are different types of closed-ended funds with different investment objectives and strategies. The expense ratio depends on the type of fund.

For the purpose of understanding what's included in the expense ratio, let's categorize them from the perspective of whether they are debt-leveraged or not. Most CEFs will exact their expenses as following:

1. Non-levered CEFs: Expense is calculated only against net assets
2. Leveraged CEFs: Expense is calculated against net assets as well as leveraged assets

These expenses are towards the annual operating expenses of the fund and include fund management fee, distribution/services fee and other administrative expenses.

As per Investment Company Act of 1940, the debt-leveraged CEFs must include the interest expense on the debt in their expense ratio.

The expense ratio does not include sales fees and other redemption charges that are levied at the time of sale/purchase of fund shares.

The total expense is listed as a percentage of the total fund assets. The expense ratio of a CEF generally ranges from 0.25% to 2% or higher.

It is important to note that other than borrowing money and issuing debt securities, a CEF can also issue preferred shares to create leverage. However, the payments to preferred shareholders are not included in the expense calculation, even though it is similar to interest payments to bond holders.

Since many leveraged funds include interest expense in the total expense ratio, this makes it difficult for investors to compare them with non-leveraged funds. This is because even though interest is an actual expense paid by the fund, it also creates excess returns. Therefore, for true comparison, the investor must adjust the expense ratio for the interest and excess returns then then compare the expense ratio for different funds.