Closed-end funds (CEFs) do not get the notoriety lavished upon their mutual fund and exchange–traded fund (ETF) counterparts. Statistics support the diminutive status of closed-end funds relative to mutual funds and ETFs.
At the end of last year, there were only 530 closed-end funds with a combined $275 billion in assets under management, according to the Investment Company Institute (ICI). By comparison, there are over 2,000 ETF trading in the U.S. alone. On its own, the SPDR S&P 500 ETF (NYSEARCA:SPY) is nearly as large as the entire universe of U.S.-listed closed-end funds.
Like ETFs, closed-end funds trade like stocks and provide intraday liquidity, a feature not found on mutual funds. However, there are a fixed number of shares with closed-end funds, a trait usually not associated with rival fund structures.
Despite their small status compared to ETFs and mutual funds, closed-end funds do offer some potency for investors, particularly in the fixed income space. With all that said, here are some promising CEFs to buy.
BlackRock Science and Technology Fund (BST)
Expense Ratio: 0.89%, or $89 annually per $10,000 invested
Many investors think of BlackRock as a dominant force in the world of ETFs. That is true as the company owns iShares and is the world’s largest ETF issuer, but BlackRock also offers an extensive lineup of closed-end funds.
That includes the BlackRock Science and Technology Fund (NYSE:BST). BST invests in “science and technology companies in any market capitalization range, selected for their rapid and sustainable growth potential from the development, advancement and use of science and/or technology (high growth science and technology stocks), and/or potential to generate current income from advantageous dividend yields (cyclical science and technology stocks),” according to BlackRock.
PIMCO Dynamic Income Fund (PDI)
Expense Ratio: 4.08%
The PIMCO Dynamic Income Fund (NYSE:PDI) is an actively managed closed-end fund that spans the globe, investing in myriad fixed income assets.
“The fund normally invests worldwide in a portfolio of debt obligations and other income-producing securities of any type and credit quality, with varying maturities and related derivative instruments. The fund’s investment universe includes mortgage-backed securities, investment grade and high yield corporates, developed and emerging markets corporate and sovereign bonds, other income-producing securities and related derivative instruments,” according to PIMCO.
This closed-end fund currently allocates over 60% of its weight to various mortgage-backed securities (MBS) and 12.41% of its weight to high-yield corporate bonds. PDI has a leverage-adjusted duration of 4.12 years.
Rivernorth Opportunities Fund (RIV)
The Rivernorth Opportunities Fund (NYSE:RIV) uses a fund of funds structure to provide exposure to other closed-end funds and ETFs. This CEF employs a long/short strategy across multiple asset classes, primarily comprised of bonds and equities.
Currently, over two-thirds of RIV’s portfolio is allocated to bonds, over 60% of which are rated junk or investment-grade. The long/short strategy can be a drag during strong-trending bull markets, such as the current one for U.S. stocks, but RIV’s long-term performance is nonetheless admirable.
This closed-end fund could be ideal for investors looking to hedge some long equity exposure as well those looking to take advantage of short bond positions as interest rates rise.
Calamos Convertible Opportunities and Income Fund (CHI)
Expense Ratio: 1.68%
The Calamos Convertible Opportunities and Income Fund (NYSE:CHI)is one of the dominant funds, closed-end fund or otherwise, in the convertible debt space. Convertible bonds are corporate bonds that the investor can later convert into common stock of the issuing company. As such, these bonds often trade with intimate correlations to stocks.
CHI employs “comprehensive, investment process includes both fundamental and quantitative research to evaluate the source, sustainability and risk of investment opportunities. Risk is monitored and managed at the diversified portfolio and individual security level,” according to Calamos.
The advantage of this closed-end fund in the current interest rate environment is that, on a historical basis, convertibles are among the best-performing corners of the fixed income universe when interest rates are rising.
Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX)
Expense Ratio: 0.92%
Generating adequate income from Nasdaq-listed tech and internet giants can be difficult. For example, the widely followed and tech-heavy Nasdaq-100 Index has a trailing 12-month dividend yield of just 0.70%.
The Nuveen NASDAQ 100 Dynamic Overwrite Fund (NYSE:QQQX) changes that income profile by using a covered call strategy.
This closed-end fund “is designed to offer regular distributions through a strategy that seeks attractive total return with less volatility than the Nasdaq 100 Index by investing in an equity portfolio that seeks to substantially replicate the price movements of the Nasdaq 100 Index, as well as selling call options on 35%-75% of the notional value of the Fund’s equity portfolio (with a 55% long-term target) in an effort to enhance the Fund’s risk-adjusted returns,” according to Nuveen.
Investors will give up some returns with this strategy, but QQQX’s market distribution rate as of Oct. 16 is a tempting 7.26%.
Tekla Healthcare Investors (HQH)
The Tekla Healthcare Investors (NYSE:HQH) is another idea for income-minded investors as this closed-end fund has a current distribution rate of 8.12%. That is significantly more than what investors are accustomed with typical biotechnology funds — a relevant comparison because this closed-end fund devotes nearly two-thirds of its weight to biotech stocks.
“HQH primarily invests in healthcare industries with an emphasis on mid to large cap biotechnology and pharmaceutical growth companies with a maximum of 40% of the Fund’s assets in restricted securities of both public and private companies,” according to Tekla.
Investing in restricted securities, such as warrants, convertibles and preferred stocks, helps boost this CEF’s income profile. Over the long term, HQH’s strategy has proven effective, as highlighted by average annual returns of 14.39% over the past decade.
Invesco CEF Income Composite ETF (PCEF)
Expense Ratio: 2.07%
The Invesco CEF Income Composite ETF (NYSEARCA:PCEF) is an ETF with significant closed-end fund exposure. The $712.60 million PCEF tracks the S-Network Composite Closed-End Fund Index and uses a fund of funds structure.
That index “currently includes closed-end funds that invest in taxable investment grade fixed-income securities, taxable high yield fixed-income securities and others utilize an equity option writing (selling) strategy,” according to Invesco.
Overall, PCEF has nearly 140 holdings, giving it broad-based exposure to a variety of closed-end fund strategies. In terms of concentration risk, that is not an issue with PCEF as none of its holdings exceed weights of 2.90%.
This closed-end fund product has a tantalizing 12-month distribution rate of 7.47% and a five-star Morningstar rating.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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