Traditional mutual funds and exchange-traded funds are "open end" because there is theoretically no limit to the number of shares sponsors can issue to satisfy investor demand. By contrast, closed-end funds have a set number of shares outstanding at any moment. CEFs raise capital by going public via an initial public offering. Fund managers then use the money raised to buy stocks, bonds or other investments. If managers are successful, over time, the value of assets in the fund should grow and the shares' value should rise. But the day-to-day price of CEF shares is a function of investor demand–which means the share price at any time could trade above or below the per-share value of the assets. For many investors, the attraction is buying when shares trade below the value of the assets–that is, at a discount.
Earnings for All
- 35 Ways to Earn Up to 11% on Your Money
- Short-Term Accounts: 1%-2%
- Muncipal Bonds: 2%-3%
- Investment-Grade Bonds: 3%-4%
- Foreign Bonds: 3%-5%
- High-Yield bonds: 3%-6%
- Dividend-Paying Stocks: 4%-6%
- Real-Estate Investment Trusts: 4%-9%
- Closed-End Funds: 4%-9%
- Master Limited Partnerships: 8%-11%
The risks: Many CEFs borrow money to boost their investment buying power. If the investments bomb, that debt can compound losses, sending a fund's share price tumbling. That's one reason CEFs require a lot of investigating, says John Cole Scott, chief investment officer at Closed End Fund Advisors, a specialist in the funds. "You've got to understand what you own," including how much borrowing is involved, he says.
How to invest: Bond CEFs are popular because they often sport high yields to attract investors. One idea worth investigating: DoubleLine Income Solutions (DSL, $20, 8.9%). The fund can invest anywhere in the world in search of high income. Recently, emerging-markets bonds were 44% of assets and corporate junk bonds were 24%. The fund's duration is 5.4, and shares recently traded at a 5% discount. Borrowed money as a percentage of investment assets–an important yardstick known as the leverage ratio–was recently 29%, modestly above the average 25% for taxable closed-end bond funds.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Another go-anywhere fund to consider is BlackRock Multi-Sector Income Trust (BIT, $17, 8.4%), which has a relatively low duration of 2.8 and a leverage ratio of 41%. The shares were recently trading at a 12% discount to net asset value.
Stephen Janachowski, head of financial advisory firm Brouwer & Janachowski, suggests another CEF-related idea: RiverNorth/DoubleLine Strategic Income Fund (RNDLX, 4.6%). This conventional mutual fund recently had half its assets invested in shares of individual CEFs and the rest in a mix of bonds. The fund, with a duration of 4.6, seeks to exploit opportunities in CEFs that are trading at discounts.
-
Best Banks for High-Net-Worth Clients 2024wealth management These banks welcome customers who keep high balances in deposit and investment accounts, showering them with fee breaks and access to financial-planning services.
-
Stock Market Holidays in 2024: NYSE, NASDAQ and Wall Street HolidaysMarkets When are the stock market holidays? Here, we look at which days the NYSE, Nasdaq and bond markets are off in 2024.
-
Stock Market Trading Hours: What Time Is the Stock Market Open Today?Markets When does the market open? While the stock market does have regular hours, trading doesn't necessarily stop when the major exchanges close.
-
Bogleheads Stay the CourseBears and market volatility don’t scare these die-hard Vanguard investors.
-
The Current I-Bond Rate Until May Is Mildly Attractive. Here's Why.Investing for Income The current I-bond rate is active until November 2024 and presents an attractive value, if not as attractive as in the recent past.
-
What Are I-Bonds? Inflation Made Them Popular. What Now?savings bonds Inflation has made Series I savings bonds, known as I-bonds, enormously popular with risk-averse investors. So how do they work?
-
This New Sustainable ETF’s Pitch? Give Back Profits.investing Newday’s ETF partners with UNICEF and other groups.
-
As the Market Falls, New Retirees Need a Planretirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
