investing

3 Ways to Earn 5% to 9% from Closed-End Funds

The trick to these investments is to buy in when they trade below the underlying net asset value of their holdings.

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.

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.

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.

Most Popular

Tax Wrinkles for Work-at-Home Employees During COVID-19
taxes

Tax Wrinkles for Work-at-Home Employees During COVID-19

Are your home office expenses deductible? How does going out of state to work for a while affect your tax picture? There are some interesting wrinkles…
November 9, 2020
Retirement: It All Starts with a Budget
personal finance

Retirement: It All Starts with a Budget

When you’re meeting with your financial planner, do you talk about your budget? If not, you should.
November 10, 2020
Will Joe Biden Raise YOUR Taxes?
taxes

Will Joe Biden Raise YOUR Taxes?

During the campaign, Joe Biden promised that he would raise taxes for some people. Will you be one of them?
November 10, 2020

Recommended

The Best T. Rowe Price Funds for 401(k) Retirement Savers
Kiplinger's Investing Outlook

The Best T. Rowe Price Funds for 401(k) Retirement Savers

A dozen T. Rowe Price mutual funds also have a place among the nation's most popular 401(k) retirement products. Find out which funds belong in your r…
November 27, 2020
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
November 27, 2020
The Best Vanguard Funds for 401(k) Retirement Savers
mutual funds

The Best Vanguard Funds for 401(k) Retirement Savers

Vanguard funds account for a third of the 100 most popular 401(k) retirement products. We rank Vanguard's best actively managed funds, including its t…
November 27, 2020
The Best American Funds for 401(k) Retirement Savers
mutual funds

The Best American Funds for 401(k) Retirement Savers

American Funds has 14 actively managed mutual funds among the 100 most popular 401(k) offerings. We look at the Best American Funds in that group, and…
November 27, 2020