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Investors, Get 7.4% From a Fund of Funds

PowerShares CEF Income Composite Portfolio invests in income-oriented closed-end funds that sell at bargain prices.

Closed-end funds are tricky. these products, which predate more popular exchange-traded funds by 100 years, hold a portfolio of stocks, bonds or both, and trade on exchanges just like stocks and ETFs do. But unlike ETFs, closed-end funds don’t come with a mechanism to keep their share prices near the value of their assets. So a closed-end fund’s price can be much different from its net asset value per share.

Savvy investors seek to capitalize on these anomalies. They buy a closed-end when it trades at a discount to its NAV, then sell when the discount shrinks or the price moves to a premium to NAV.

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But why bother with the complexities when you can buy an ETF that does the work for you? PowerShares CEF Income Composite Portfolio (Symbol PCEF) tracks an index of income-oriented closed-end funds. The ETF holds closed-ends that own high-quality bonds and ones that own junk bonds; it also holds funds that sell options against their holdings. The index the ETF tracks favors funds that trade at a deep discount to NAV and underemphasizes those that sell at premiums. “Taking advantage of disconnects between premiums and discounts is at the heart of closed-end fund investing,” says Scott Eldridge, of Invesco PowerShares.

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The result is a product that delivers a terrific 7.4% yield and has traded in a fairly narrow range since its launch five years ago.

K5I-ETF SPOTLIGHT.indd
K5I-ETF SPOTLIGHT.indd

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