An alternative for some investors.
Investors can be excused for worrying about the stock and bond markets. Stocks have had some scary plunges, and bonds are under threat from rising interest rates. In a rough market, some experts recommend an alternative to the mainstream mutual funds -- closed-end funds, or CEFs, that trade like stocks and can pay double-digit yields. "I believe closed-end funds provide a tremendous opportunity after sharp corrections in the market as we've seen recently," says Sterling D. Neblett, founding partner at Centurion Wealth Management in McLean, Virginia. Here are more details about CEFs and seven that are producing well.
A choice for yield hunters.
Closed-end funds are suitable for investors that want additional portfolio income because they tend to pay very high yields, says Lyn Alden, founder of Lyn Alden Investment Strategy in New Jersey. "In addition, the CEF market is small and doesn't get a lot of focus from major institutions, so it's not very efficient and hands-on investors can often find undervalued gems in the space. During bear markets, it's not uncommon to find high-quality CEFs trading at only 80 percent of what their net asset values (NAVs) are worth, so when the market eventually recovers, the fund can recover even more, giving investors an outsized gain."
The CEF market is limited.
A closed-end fund pools investors' money to buy stocks, bonds or other assets. The fund starts with a fixed number of shares that are traded on an exchange anytime during the day at a discount or premium to the fund's net asset value. Fixed-income investors should weigh the income-only yield rather than the distribution yield, which includes capital distributions that may not be as dependable going forward as income from dividends and bond coupons. Investors should be cautious about volatile or leveraged CEFs.
NexPoint Strategic Opportunities Fund (NHF)
NHF yields just over 17 percent, trades at a 12.3 percent discount and lost nearly 6.7 percent in the 12 months ended Jan. 16. The fund owns a variety of stocks and bonds, uses leverage and seeks profits from arbitrage. Holdings include real estate investment trusts and Jernigan Capital (JCAP).
Expense ratio: 2.5 percent.
AllianzGI Convertible & Income Fund II (NCZ)
The NCZ yields 11.4 percent, has a nearly 6 percent premium and has lost about 6.5 percent in the past year. This is a leveraged income-oriented fund that invests in convertible securities as well as nonconvertibles. Holdings includes banker Wells Fargo & Co. (WFC) and the medical technology company Becton Dickinson and Co. (BDX).
Expense ratio: 1.3 percent
Pimco Global StocksPLUS & Income Fund (PGP)
The PGP fund yields 11.1 percent, has a premium of nearly 47 percent and has returned 14.6 percent in the past year. It invests in U.S. and non-U.S. stock derivatives as well as debt. Investments include the gaming company Caesars Entertainment Corp. (CZR)
Expense ratio: 2.36 percent.
First Trust Specialty Finance & Financial Opportunities Fund (FGB)
This closed-end fund yields 10.4 percent, trades at a 2.8 percent premium and has returned 3.1 percent in the past year. It invests in specialty finance and financial companies. FGB's holdings include Ares Capital Corp. (ARCC).
Expense ratio: 2.38 percent.
Barings Global Short Duration High Yield Fund (BGH)
The BGH yields 10.4 percent, has a 10 percent discount and has lost 2.2 percent in the past year. It invests primarily in below-investment grade income-producing securities like bonds and loans. Holdings include the multinational Bausch Health Companies (BHC).
Expense ratio: 2.33 percent.
Pimco High Income Fund (PHK)
The PHK closed-end fund yields 10.1 percent, trades at a 37.7 percent premium and returned nearly 24.4 percent over the past year. It invests in debt securities below investment grade and emphasizes income over growth.
Expense ratio: 1.48 percent.
Stone Harbor Emerging Markets Income Fund (EDF)
For investors interested in developing choices outside the United States, there is the EDF fund. It yields 10 percent, has a 17.1 percent premium and has lost nearly 7.8 percent over the past year. It invests primarily in securities from emerging markets or tied to emerging markets, such as Argentina, Indonesia and Russia.
Expense ratio: 2.59 percent.
Top-producing closed-end funds for investors.
Here are seven of the top-producing closed-end funds to buy:
-- NexPoint Strategic Opportunities Fund (NHF)
-- AllianzGI Convertible & Income Fund II (NCZ)
-- Pimco Global StocksPLUS & Income Fund (PGP)
-- First Trust Specialty Finance & Financial Opportunities Fund (FGB)
-- Barings Global Short Duration High Yield Fund (BGH)
-- Pimco High Income Fund (PHK)
-- Stone Harbor Emerging Markets Income Fund (EDF)
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